Lloyds Profit Wiped Out By Coronavirus Bad Loan Provision

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(Bloomberg) — Lloyds Banking Group Plc’s profit was wiped out by a fresh 2.4 billion-pound ($3.1 billion) charge for bad loans in the second quarter as the lender braces for more pain from the coronavirus pandemic.

Britain’s biggest mortgage lender said Thursday it now expects to set aside between 4.5 and 5.5 billion pounds this year to cover the economic fallout from months of lockdown and the end of government support programs.

“The outlook has clearly become more challenging since our first quarter results, with the economic impact of lockdown much larger than expected at that time,” said Chief Executive Officer Antonio Horta-Osorio.

Shares in the bank fell as much as 9.3% in London.

Payment Holidays

Lloyds is the latest U.K. bank preparing for a deeper recession. The lender’s severe scenario now includes a spike in unemployment to 12.5% by the second quarter next year and a contraction in the economy of 17.2% this year.

Chief Financial Officer William Chalmers told reporters it’s too early to say how many loans provided under government-backed programs will turn sour. Lloyds wrote off just 10.5 million pounds of loans to small- and medium-sized companies in the first half, below average for the past three years. About 72% of borrowers who took breaks on their mortgages in the first quarter are making repayments, while there was a “large uptake” for payment holidays on credit cards in the past three months, the bank said. The government has extended borrower support until October.

Lloyds’ provision was 1 billion pounds above analyst forecasts and took the bank to a statutory pretax loss of 676 million pounds for the second quarter. Its gloomy outlook comes a day comes a day after rival Barclays Plc announced a higher than predicted charge to cover bad loans, sending its shares down 6%. Analysts expect Natwest Group Plc to follow suit with an impairment of 943 million pounds in its results on Friday.

“The long term challenges of low interest rates and anemic economic growth are probably here to stay for some time,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

Disappointing Outlook

Lloyds also updated its guidance for net interest margin, a measure of profitability, which is expected to remain at a lowly 2.4% for the rest of the year. It’s a “very disappointing outlook,” said Edward Firth, analyst at Keefe Bruyette & Woods.

Horta-Osorio, who is set to leave the bank by next June, said the group’s three-year plan is likely to emerge later in 2021, after his successor is appointed and Robin Budenberg, the bank’s new chairman, joins the board in October.

“Coronavirus has changed many things,” said Horta-Osorio. “We are reviewing our options.”

(Adds detail on provisions, analyst comments, chart from sixth paragraph)

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