By Scott Wright
SHARES in Lloyds Banking Group plunged seven per cent, wiping nearly £1.8 billion from its stock market worth, after a hefty provision made for the impact of coronavirus caused profits to tumble in the first quarter – and the bank warned the impact would continue into the months ahead.
The Bank of Scotland owner booked an impairment charge of £1.43bn billion as it anticipated bad-debt charges will rise amid the bleak outlook for the economy. It said its previous guidance is “no longer appropriate” given the “significant change” to the outlook and operating environment.
Lloyds warned that it will “inevitably be impacted both within the existing book and potentially in the new lending we are undertaking to support our customers”, though insisted that its loan portfolio “remains robust”.
The £1.43bn provision led statutory profits at Lloyds to tumble to £74 million for the three months ended March 31, which compares with a profit of £1.6bn for the first quarter of last year.
The bank joined peers Barclays, HSBC and Santander in making big provisions for the impact of the pandemic this week, with Royal Bank of Scotland expected to follow suit when it announces its quarter one results today.
Royal Bank chairman Sir Howard Davies told shareholders on Wednesday that it was “inevitable” bad-debt charges would rise for all major banks because of the blow to the economy. He said: “It is obvious that if the economy goes into recession this year, which is highly likely, that there will be, for all banks, increased impairments.”
Lloyds reported that net income of £3.95 billion, 11 per cent lower than in the first three months of 2019, which the bank said reflects factors such as low interest rates, competitive asset markets, and the slowdown in the retail and commercial markets in March following the outbreak of coronavirus. Its net interest margin fell by 12 basis points to 2.79%.
The Bank of England slashed the base rate to a historically low 0.1% from 0.25% in March to support the economy through the coronavirus.
Lloyds increased loans and advances by £2.7bn in the first quarter to £443.1bn, up from £440.4bn at December 31, driven by an increase in corporate lending, mainly draw-downs on existing corporate facilities in response to the pandemic. This was partly offset by expected reductions in its mortgage book and credit card balances, reflecting reduced consumer activity in March.
The bank highlighted in the accounts its participation in the UK Government’s Coronavirus Business Interruption Loan Scheme (CBILS), noting that it has approved £410 million of loans to small and medium-sized enterprises (SMES). It said it has also supported business customers through its £2bn Covid-19 fund, which has included the offer of around 37,000 fee-free overdrafts, capital repayments holidays and increases in working capital.
For personal banking customers, the bank said it has granted around 400,000 mortgage payment holidays by April 24.
Lloyds announced previously that it had agreed to cancel the payment of its final dividend for 2019, following a request from the Prudential Regulation Authority to protect banks’ capital positions. It will pay no quarterly and interim dividend payments until the end of 2020.
Directors have given up all of their bonus entitlement for 2020, the bank said, and no cash bonuses are payable to senior staff for the rest of the year.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Lloyds is feeling the pinch from not having a large investment bank. While rivals Barclays and HSBC have seen an increase in trading activity offset weaker interest income, Lloyds must take a hit on the chin. The fall in the Bank of England base rate meets revenues are sharply lower and provisions for bad loans have decimated profits.
“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.”
Shares in Lloyds closed down 7.25%, or 2.52p, at 32.24p.
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