Atlantic View – Impairment Shock At Lloyds Banking Group #LLOY Despite Balance Sheet Strength

Eponymous banking giant Lloyds (LLOY) this morning reported half year results to June 30. The bank plunged into the red after recording a £3.8 billion provision for bad loans arising from the coronavirus crisis – almost £1.8 billion higher than financial analysts had expected. The results revealed a pre-tax loss of £602 million compared to profits of £2.9 billion for the same period in 2019, on net income of £7.4 billion, also 16% lower. Lloyds said it had set aside £2.4bn for possible loan losses in the three months to June alone as the UK economy became mired in the coronavirus lockdown.

The bank also pointed to a strong balance sheet, well positioned to absorb coronavirus impacts. This was in part due to a £29 billion increase in customer deposits during the period as a result of reduced consumer spending and “inflows to the Group’s trusted brands in an uncertain environment.”

The group loan to deposit ratio now sits at 100 percent, “providing significant potential to lend into recovery, with a strong liquidity position.” Lloyds said a CET1 ratio of 14.6 percent “provides significant headroom above lower regulatory requirements of c.11 per cent as a cushion against potential credit impairment.”

There have been early signs of recovery in the Group’s core markets, mainly in consumer spending and the housing market, but the outlook remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year. Looking forward, group operating costs are expected to be below £7.6 billion, with impairments expected to be between £4.5 billion and £5.5 billion.

CEO António Horta-Osório said that the impact of the coronavirus pandemic in the first half of 2020 “has been profound on the way we live our lives and on the global economy. We remain fully focused on helping our customers and the UK economy recover, in collaboration with Government and our regulators.”