The latest charge brings total provisions for wrongly sold payment-protection insurance to £11.3bn, Lloyds said yesterday. It is the highest bill of any British lender. Third-quarter pretax profit before one-time items rose 41% to £2.16bn.
Lloyds CEO Antonio Horta-Osorio, 50, has seen his plans to return the lender to full private ownership and resume dividend payments hurt by rising misconduct charges including a fine of £226m for rigging benchmark interest rates.
The bank announced 9,000 job cuts and 150 branch closings to cut £1bn in costs by 2017 as customers shift to online services. “There’s a worse-than-expected legacy charge — £900m for PPI is much, much worse than expectations,” said Ian Gordon, an analyst at Investec in London with a ‘buy’ rating on the stock.
“Despite that, the under-lying picture is good and the capital build is strong.”
The government sold a £4.2bn stake in Lloyds in March, leaving it with 25% ownership of the bank. It still owns 80% of Royal Bank of Scotland Group. Lloyds cut its impairment charges by 59% to £1.2bn in the first nine months, with £259m set aside in the third quarter, down from £670m in the year-ago period.
The cost-to-income ratio was 48% in the third quarter, down from 52% a year ago. While weekly PPI reactive complaint volumes are down 18% from a year earlier, they’re “marginally higher” than in the previous three months, Lloyds said. The provision represents the group’s “best estimate of total costs but a number of risks and uncertainties remain,” it said.
Lloyds chief financial officer George Culmer said he is “disappointed to have to provide again”, adding he could not give an estimate on the final PPI bill. Citigroup analysts led by Andrew Coombs forecast Lloyds to take an additional €1bn in PPI charges next year.
While the bank has benefited from growing economies in the UK and Ireland, boosting housing demand, it is seeking ways to cut costs as customers increasingly use online banking. The lender, which has about 88,000 full-time staff and over 2,000 branches, has cut more than 37,000 jobs since its government bailout in 2008.
Under its three-year plan, Lloyds targets a cost-to-income ratio of about 45% by the end of 2017, while investing some €1bn in digital technology. Branches “will continue to play an important role,” the bank said. Customer deposits were £445.4bn at the end of September, up £7.1bn from the end of 2013, the bank said.
The net interest margin, the difference between income and lending, widened to 2.5% in the third quarter from 2.2% a year earlier, while the fully loaded common equity Tier 1 ratio, a measure of financial strength, was 12%, up from 10.3% at the end of 2013.
Lloyds is revamping its business at a time when smaller banks are seeking to challenge the dominance of Britain’s largest lenders. Lloyds said it expects its net interest margin to be about 2.45% in the full year, with the statutory profit seen to be “significantly ahead” of the first half. Culmer said he “remains hopeful” the bank can pay a dividend for 2014, adding he “would expect to pass” the Prudential Regulation Authority stress test later this year. “We’re in a good position,” he said .