Of Special Interest

6th May 2011

PPI charge creates Lloyds Banking pre-tax £3.5bn LOSS

Lloyds Banking Group reported a net attributable LOSS for Q1 of £2,439m (€2,710m $4,033m ¥326.9bn Y26,191m) compared with a year ago PROFIT of £169m. When comparing a LOSS with a previous profit it is often better to remove the tax effect and look at profit before tax, namely a LOSS of £3,471m (€3,857m $5,740m ¥465.2m Y37,273m) compared with a year ago pre-tax PROFIT of £721m.

The main factor in the LOSS is a £3.2bn charge to settle Payment Protection Claims. The UK banks recently lost the latest round in their attempts not to have to pay compensation to customers who believe they were sold this type on insurance. Not only is Lloyds one of the largest UK banks but it was by far the most aggressive in selling this form of insurance. It is estimated that they have 30% of current and recent past policies and it is probable that they have more than 30% of the claims made. It is interesting to note that the other partially state owned bank, Royal Bank of Scotland, is second largest player in the PPI market.

Lloyds Banking state in the report that excluding the PPI charge their performance was satisfactory. This assertion may be questionable with total income DOWN 38%. Although true that most banks suffered from lower trading revenues Lloyds trading fell £4.5bn, equal to 80%. With regard to core business, NII was down nearly 5% and Loan impairments rose 14%. If you were to present loan impairment below NII to show the raw margin from lending, as is the custom in many countries, it would give a margin of £709m versus £1,118m in Q1 2010, a fall of 37%. Volatility of insurance business which led to a £333 LOSS was used as an excuse however the benefit of £829m from fair value gain was not given the same prominence.

It is common practice for a widespread 'cleaning of the decks' at the beginning of a CEO's term of office which makes it easier to show improvement thereafter. None the less, the accounts indicate that there will be immense pressure on, António Horta-Osório, for rapid reform at the bank.

Income Statement for Q1 2011 2010
£m £m
Interest and similar income 6,648 7,352
Interest and similar expense (3,756) (4,323)
Net interest income 2,892 3,029

Net fee and commission income 742 746
Net trading income 1,115 5,614
Insurance premium income 2,048 2,133
Other operating income 842 821
Other income 4,747 9,314

Total income 7,639 12,343
Insurance claims (2,451) (6,310)
Total income, net of insurance claims 5,188 6,033
Operating expenses (6,485) (3,373)
Trading surplus (1,297) 2,660
Impairment (2,183) (1,911)
Share of joint ventures and associates 10 (28)
(Loss) profit before tax (3,470) 721
Taxation 1,041 (517)
(Loss) profit for the period (2,429) 204
Attributable to non-controlling interests 10 35
Attributable to equity shareholders (2,439) 169