Weekly Market Outlook

Lloyds Banking Group posts 1.9 billion pound third-quarter pretax profit despite Brexit headwinds

Lloyds Banking Group (LLOY.L) on Wednesday reported third-quarter profits largely unchanged from a year ago, confounding initial expectations of a sharp squeeze on earnings caused by Britain’s surprise vote to quit the European Union.

Underlying pretax profits were 1.9 billion pounds, slightly under the 1.97 billion pounds booked in the corresponding period a year ago.

Rescued in a 20.5 billion pound taxpayer bail-out during the financial crisis, Lloyds is the first major British bank to report results that fully capture the period after the referendum results.

As late as August, some economists were predicting the onset of recession in Britain following the vote, but recent data has suggested the economy and housing market remains upbeat, with a better-than-expected Purchasing Managers’ Index survey and robust demand for mortgages.

Chief Executive Officer Antonio Horta-Osório said that he had not seen much impact on consumer or corporate activity from Brexit, but that in the longer run investment would be needed to counteract the expected economic slowdown.

“We strongly believe that the economy requires a fiscal stimulus in terms of infrastructure and housebuilding,” Horta-Osório said, adding that he hoped the government would announce such investment in the chancellor’s autumn budgetary statement.

Horta-Osório is searching for ways to prop up Lloyds’ dividend and profits against a more testing economic enviornment and the effects of lower-for-longer interest rates caused by the vote to leave the EU.

Since June’s referendum, shares in Lloyds (LLOY.L) have fallen by about a quarter, partly reflecting their heavy exposure to any downturn in the British economy.

However, Lloyds posted total income of 4.3 billion pounds, broadly in line with the same period a year ago and reported 452 billion pounds of total loans and advances to customers, just 1 billion pounds under the figure for three months earlier.

Britain’s largest retail bank also booked a fresh 1 billion pound charge to compensate customers mis-sold loan insurance after the Financial Conduct Authority pushed back the claims deadline by a year to mid-2019.

The bank has been forced to set aside about 17 billion pounds since the financial crisis to repay customers who took out policies to protect borrowers against sickness or redundancy, but were often ineligible to claim.

Lloyds also reported a 740 million pound deficit in its pension fund, which has been hit by falling bond yields in recent months.

The bank said its net interest margin, the difference between the interest it gets from borrowers and what it pays savers, a key revenue driver, was 2.69 percent for the third quarter, down from 2.74 percent three months earlier.

Besides making fresh provisions to repay customers mis-sold loan insurance this quarter, Lloyds also reported legal and compliance costs of 150 million pounds, including 100 million pounds to cover issues related to packaged accounts.

Lloyds also said it welcomed a decision by the government to resume selling its remaining 3.6 billion pound stake via a trading plan to institutional investors, as it seeks to return Lloyds to full private ownership eight years after its bailout.

(Reporting By Andrew MacAskill and Lawrence White, Editing by Sinead Cruise)