Shares in consumer-facing banking group Lloyds (LLOY) slid 6% to 32.75p after first quarter earnings were almost entirely offset by a significantly increased impairment charge given the revised economic outlook.
Statutory pre-tax profit for the three months to 31 March was £74m, down 95% on the previous year due to a £1.43bn provision under the new IFRS 9 guidelines which require banks to factor in a worsening outlook for the UK economy as well as setting aside money for existing bad loans.
The bank also cautioned that ‘the impact of lower rates, lower levels of activity and higher impairment on the group's business will continue into the second quarter’, leading it to withdraw its previous earnings guidance for this year.
UK MARKET SLOWING
Underlying operating profits were down 19% in the quarter to £1.99bn as net income shrank by 11% to £3.95bn due to a combination of lower interest rates, a continuing squeeze on net interest margins - which was exacerbated by two Bank of England rate cuts - and ‘a slowdown in retail and commercial markets in March.’
Lloyds has the biggest exposure of all the high street lenders to the UK mortgage market, as well as significant exposure to credit card borrowing, meaning its success is ‘inextricably linked to the health of the UK economy’ in the words of chief executive Antonio Horta-Osório.
Across mortgages, personal and business loans, credit cards and motor finance it has so far approved 880,000 payment holidays, as well as allowing free overdrafts up to £500 on current accounts and removing fees for missed payments.
The bank saw a sharp reduction in overall credit card spending in March compared with last year and data for April is likely to show that slide continuing.
As its base case the bank is expecting UK GDP to contract by 5% this year, leading to a 5% fall in house prices and an increase in unemployment to just under 6%.
For 2021 it sees the economy recovering by 3%, house prices rising by 2% and unemployment falling to 5.4%.
