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LONDON (Alliance News) - Lloyds Banking Group PLC Tuesday said it swung to a third-quarter pretax profit, as strong underlying growth more than offset a new GBP900 million charge to cover the payment protection insurance mis-selling scandal.
The bank also detailed new strategy plans, under which it will cut 9,000 jobs and close 150 branches net over the next three years.
Lloyds, which is still 25%-owned by the UK government following its bailout during the financial crisis, said it made a GBP751 million pretax profit in the three months ended September 30, compared with a GBP440 million pretax loss in the corresponding quarter last year. On an underlying basis, which excludes assets sales, costs associated with the spin-off of TSB Banking Group PLC, and the PPI charge, profit increased to GBP2.16 billion from GBP1.52 billion.
Although Lloyds' numbers are improving as it continues its recovery plan following the financial crisis, the bank's PPI bill has also been on the up, now standing at GBP11.33 billion in total. In a conference call with journalists, Chief Financial Officer George Culmer declined to rule out further increases to that provision, though he did say the volume of complaints has fallen since the end of the third quarter.
Continuing to make provisions for PPI is no help to Lloyds' capital position as it continues discussions with its regulator, the Bank of England's Prudential Regulation Authority, over resuming dividend payments. Culmer told journalists that he still hopes the bank will be in a position to pay a dividend in respect of the current financial year.
However, the dividend decision will take into a number of factors, including the bank's capital position, earnings and how Lloyds fares in the Bank of England's stress tests on the UK's eight major banks and building societies. The outcome of the tests will be published on December 16, and follows Lloyds' underwhelming results under the European Banking Authority's health check of banks across Europe. Culmer said he expects Lloyds to pass the Bank of England's stress test.
Lloyds is also keeping a watchful eye on The Financial Policy Committee's review of the leverage ratio, due Friday at 1400 GMT. The ratio is a simple unweighted ratio of a bank?s equity to a measure of its total un-risk-weighted exposures, and is designed to guard against weaknesses in banks' ability to model risk. Although the Basel Committee on Banking Supervision has set a provisional leverage ratio of 3%, that percentage could be set to rise as domestic and international regulators seek to ensure banks are sufficiently prepared in the event of another financial crisis.
Lloyds' leverage ratio increased by 0.2 percentage points to 4.7% over the course of the third quarter.
Tougher regulatory demands underline the pressures facing banks, which have had to undergo intensive restructuring in order to meet the new rules. Higher regulatory costs have led to banks making savings elsewhere. Lloyds, which has the largest branch network in the UK, confirmed job losses and branch closures under plans to digitise and automate the business to make it more efficient.
Lloyds said it will invest about GBP1 billion over the next three years in order to provide "simple and efficient" digital products and services for customers across its businesses. Over the same period, the group expects to commit over GBP30 billion of additional net lending to UK personal and commercial customers.
In the medium-term, and as a result of the strategy update, Lloyds is targeting a cost:income ratio to exit 2017 at around 45%, with reductions in each year; a simplification run-rate savings of GBP1 billion a year by the end of 2017; an asset quality ratio of around 40 basis points through the economic cycle, and lower than this over the next three years; and sustainable returns on required equity of around 13.5-15% by the end of the strategic plan period and through the economic cycle.
Chief Executive António Horta-Osório told journalists that the bank had to adapt to meet customers' increasing tendency to do their banking through a mixture of online, mobile and branch services. He still expects that the bank will have the largest branch network compared with peers.
Horta-Osório said customers still value the free banking model, and he doesn't believe it inhibits innovation or competition.
Lloyds shares were down 2.4% at 73.52 pence Tuesday morning, the second-worst performing stock on the FTSE 100.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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