High-street banking group Lloyds (LLOY) was one of the worst performers on the FTSE 100, down 2.4% to 56.2p, after it reported a 12% fall in underlying profits for the third quarter thanks to a huge charge for mis-selling payment protection insurance (PPI).
Earnings in the three months to 30 September were £1.82bn against £2.07bn a year ago after the bank took a £1.8bn provision as claims soared ahead of the 29 August deadline. In total Lloyds has set aside £22bn of charges for mis-sold PPI and other ‘misconduct’, more than any other UK bank by a considerable margin.
Last month the bank announced that it would suspend its £1.75bn share buyback as PPI charges meant its full year Return on Tangible Equity (RoTE) would miss its target of 12%.
At the operating level, net interest income dipped 2% to £3.13bn as the loan book stayed flat at £447bn and the net interest margin - the difference between the rate the bank charges on loans and the rate it pays on deposits - fell slightly to 2.88%.
On the plus side, operating costs were down 4% to £1.91bn meaning the bank's cost-to-income ratio is now the lowest in the sector at 46.5%. In other words for every pound of income, just 46.5p are eaten up in costs.
CHALLENGING ENVIRONMENT
The bank said that due to the ‘challenging’ economic backdrop it would ‘maintain its prudent approach to growth and risk’ although it admitted that continued uncertainty ‘could further impact the outlook’.
Business and consumer confidence have both taken a hit as the uncertainty over Brexit drags on. The number of UK companies going into administration in the third quarter jumped 20% to a five-year high according to the Insolvency Service, while the this month's consumer confidence survey by market researchers GfK showed the weakest reading for six years.
Over the first nine months mortgage lending grew by just 1% to £271bn, although this excluded £3.7bn of mortgages which Lloyds bought from Tesco (TSCO) in September as they were due to be transferred at the end of last month, after the quarter had closed.
Credit-card lending to consumers was down 4% to £17.7bn over nine months but motor finance jumped by 14% to £15.6bn as the market for second-hand cars and vans continued to hold up well.
Lending to small and medium-sized businesses (SMEs) grew marginally to £63.1bn, while the amount of money in businesses’ bank accounts continued to mount. Commercial current accounts increased their haul by 3% to £34.6bn while deposits inched up by 1% to £135.8bn as companies hoarded cash.
In common with other banks, the proportion of bad loans is rising albeit from a low base. The ‘asset quality ratio’ - which sounds better than non-performing loan ratio - rose to 0.33% of assets against 0.25% a year ago, while third-quarter charges for impairments rose 30% to £371m taking total provisions so far this year to £950m.
