(BN) Lloyds Says Bad Loan Provisions to Fall After First-Half Loss

By Jon Menon
Aug. 5 (Bloomberg) -- Lloyds Banking Group Plc, the U.K.
bank that acquired HBOS Plc in January, said provisions for bad loans will decline "significantly" after it posted a first- half loss of 3.1 billion pounds ($5.2 billion).
The lender set aside 13.4 billion pounds in the period to cover souring commercial and real estate loans, more than the
11.3 billion-pound estimate of eight analysts surveyed by Bloomberg. Those impairments have "peaked" and will fall in the second half, the London-based bank said in a statement today.
Lloyds sought a 17 billion-pound bailout from taxpayers after it agreed to buy HBOS in September in a government- brokered deal to prevent the collapse of Britain’s biggest mortgage lender. HBOS accounted for about 80 percent of the combined bank’s bad loan provisions, Lloyds said today.
"The HBOS loan losses are severe," said Richard Champion, who helps manage $2 billion including Lloyds’s stock at Principal Investment Management Ltd., in Sevenoaks, England.
"Looking forward, they are saying we are getting back to more normal conditions and loss levels are stabilizing, which will be taken positively,"
The stock rose 5.5 percent to 88.9 pence as of 9:19 a.m. in London trading. The bank has declined 10 percent this year, making it the worst-performer in the FTSE 350 Banks Index, which has gained 18 percent in the period.
"The overall impairment charge has now peaked," Lloyds said. "The charge in the second half of 2009 will be significantly lower than the charge in the first half of 2009.
Thereafter, we expect the 2010 charge to be significantly lower than the 2009 charge."

‘Kitchen Sink Job’

"This isn’t what usually happens before a trough in a recession," wrote Sandy Chen, an analyst at Panmure Gordon & Co.
who has a "sell" rating on the stock, in an e-mailed note to investors today.
The U.K. economy will shrink 4 percent this year before expanding by about 1.8 percent in 2010, Lloyds Chief Executive Officer Eric Daniels said. The bank expects a "gradual return"
to economic growth in the next 18 months, adding that any rebound will be "modest." House prices are likely to decline by about 7 percent this year before increasing 2 percent in 2010, the bank said.
"We need to see more detail in the presentation to establish to what extent this is a kitchen sink job and whether we believe this," said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London with a "sell" rating on Lloyds.

Northern Rock, Barclays

The loss is the biggest reported so far by a U.K. bank for the period. Northern Rock Plc, the first U.K. bank nationalized during the credit crisis, yesterday posted a 771 million-pound loss for the period as late payments on mortgages climbed.
Barclays Plc, the U.K.’s second-biggest bank, reported a 10 percent increase in net income, helped by its securities unit, while HSBC Holdings Plc, Europe’s biggest bank, posted a 57 percent drop in profit. Edinburgh-based Royal Bank of Scotland Group Plc will report earnings Aug. 7.
The loss was driven by "the high levels of impairment, mainly from the HBOS property book," Daniels, 57, said in a telephone interview today. "The core business is doing extremely well." Lloyds is the U.K.’s biggest provider of checking accounts and has a 28 percent share of the mortgage market.
Lloyds’s proforma loss compared with a profit of 1.95 billion pounds in the year-earlier period. On a statutory basis, Lloyds had net income of 7.1 billion pounds. That included an
11.2 billion-pound gain from the HBOS purchase because the price paid for the assets was less than their fair value.

Win Bischoff

The bank last week named Win Bischoff, 68, as chairman to replace Victor Blank, who is retiring after brokering the HBOS acquisition. The former Citigroup Inc. chairman and government adviser takes up the post on Sept. 15.
Now 43 percent owned by the U.K., Lloyds has cut more than 8,800 jobs this year to reduce costs by 1.5 billion pounds by 2011. The savings are "ahead of schedule," Daniels said today.
Lloyds may be forced by the European Union to sell branches and other assets to take part in a plan to insure 260 billion pounds of assets with the government. That insurance plan may take "months" to conclude, Daniels said.
Lloyds’s net interest margin, a measure of the bank’s profit on lending, declined to 1.72 percent from 2 percent in the first half. Tier 1 capital, a measure of financial strength, stood at 6.3 percent at the end of June, the bank said.
"The bank is going through its period of maximum stress right now," John Paul Crutchley, an analyst at UBS AG in London said in a note to clients before the earnings were published.
"Losses on the HBOS loan book have accelerated to levels beyond original expectations," said Crutchley who has a "buy" rating on the stock.