Lloyds posted a statutory profit before tax of £2bn in the three months to the end of September © Bloomberg
Lloyds Banking Group has more than doubled profit in the third quarter, boosted by the absence of a provision for payment protection insurance, the UK’s costliest mis-selling scandal.
The bank posted a statutory profit before tax of £2bn in the three months to the end of September, up from £811m in the same period last year. The result beat analysts’ forecast of £1.6bn.
The profit was buoyed by the lack of a PPI bill, after Lloyds was forced to earmark £1bn in the same period last year. The bank also set aside £1.1bn in the first half of 2017, as the number of claims increased after the financial regulator confirmed the compensation deadline as August 2019.
The end of PPI will serve as a big reprieve for the bank, which has been worst hit by the scandal, provisioning more than £18bn to date. The latest results were the first since the fourth quarter of 2016 not to have any PPI provisions.
The results also mark a further step in turnround efforts spearheaded by António Horta-Osório, chief executive of Lloyds, to repair the bank following its bailout during the financial crisis. The lender, which was returned to private ownership this year after the government sold out in May, has shed billions of pounds of toxic assets since the crisis, replaced short-term wholesale funding with deposits and is eyeing the end of PPI.
However, the bank said PPI claim levels increased following a recent advertising campaign launched by the Financial Conduct Authority. George Culmer, finance director of Lloyds, said “of course there is a risk” that the bank will have to provision more as there are “three more advertising campaigns to come”, but noted that the bank has about £2.3bn of its PPI pot that has not yet been spent.
The bank is also dealing with a scandal over the treatment of former HBOS customers who say their businesses were crippled by the bank before it was acquired by Lloyds in 2009.
Lloyds made no “other conduct provisions” in the third quarter. This meant statutory profit was less affected by one-off costs. Stripping out one-off items, the bank reported an underlying profit of £2.1bn, up from £1.9bn in the same period a year ago.
The strong results spurred the bank to upgrade its forecast for the amount of capital it expected to generate this year. Gary Greenwood, an analyst at Shore Capital, said: “We think this should give the market confidence around dividend expectations.”
It said it expected the net interest margin — a key figure of profitability — to be around 2.85 per cent at year-end. Mr Horta-Osório said: “In the first nine months of the year we have delivered strong financial performance with increased underlying and statutory profit, a significant improvement in returns and strong capital generation.”
Lloyds said the UK housing market “has been resilient” and overall credit performance in its mortgage business remains stable. The bank, which has recently pushed into consumer credit, said its motor finance unit has a “stable credit performance”, while its credit card book has seen reductions in persistent debt.
The comments follow concern among regulators over the rapid rise of consumer credit, which is growing at an annual rate of about 10 per cent.
Mr Horta-Osório said “there has been some softening in consumer confidence and spending following the recent depreciation of sterling and rise in inflation”. He said he did not expect a possible interest rate increase next month would “put any stress in the economy” as rates were at a record low.
Lloyds posted an 8 per cent increase in total income to £4.6bn. The bank’s net interest margin — the difference between the interest it receives from lending and the amount it pays out, relative to assets — improved to 2.9 per cent in the third quarter, up from 2.7 per cent in the same period a year ago.
Profit was also partly driven by slightly lower costs, with the cost-income ratio falling to 46 per cent, from 47.5 per cent a year ago. Lloyds has accelerated efforts to remove jobs and close branches over the past few years, targeting £1.4bn of savings by the end of 2017.
It is part of a broader push by Mr Horta-Osório to lower expenses and digitise the bank for the future.
The bank said that it hit £1.3bn of its savings target at the end of September, as it “continues to invest significant amounts in developing its digital capability and further simplifying its processes”.
The chief executive is aiming to unveil his third strategic review at the start of next year. He is expected to outline his focus on expanding into the retirement and financial planning market, and growing in lending to SMEs.
The bank also boosted its capital buffers — common equity tier one ratio — to 14.1 per cent post dividend.