Lloyds makes provision for potential mis-selling

First quarter profits fell sharply at part-nationalised lender Lloyds Banking, as the bank took an impairment charge that was half a billion pounds larger than it was expecting.The group, still labouring under the weight of the controversial HBOS acquisition, saw profit before tax fall to £284m in the first quarter on a combined businesses basis from £1,104m the year before, after a negative movement in enhanced capital notes (ECN) equity conversion feature of £398m (Q1 2010: £173m).The company made a £3.2bn Payment Protection Insurance (PPI) provision, excluded from combined businesses results, for potential costs of customer contact and/or redress, following High Court judgment and discussions with the Financial Services Authority.PPI is meant to provide a safety blanket to ensure that in exceptional circumstances, such as illness or redundancy, loan repayments are maintained, but the policies have been widely criticised as being so full of small print get out clauses for the financial service provider as to be practically worthless.The PPI provision pushed the bank deep into the red, with a statutory loss before tax of £3.47bn, versus a profit of £721m in the first quarter of 2010.Underlying income fell to £5.20bn from £5.97bn a year earlier and £5.75bn in the preceding quarter, with the decline reflecting the losses on sales of non-core treasury assets of £426m, lower banking net interest margin, which includes the impact of higher funding costs, the ongoing reduction in the size of the balance sheet from non-core asset reductions, continued customer deleveraging and subdued lending demand. Broker Nomura Securities had forecast profit before tax (before fair value unwind and restructuring costs) of £800m and total net income of £5.7bn.The group impairment charge was £2.61bn, up from £2.42bn in the first quarter of last year. It was some £500m higher than anticipated predominantly due to Ireland, where the impairment charge was £1,144m in the first quarter, as the group is now allowing for further potential falls in commercial real estate prices in Ireland of around 10%. The impairment charge in the remainder of our portfolio overall was in line with expectations.Non-core asset reductions were ahead of expectations at £20.7bn in the quarter. The reduction includes sales of treasury assets of £10.7bn, resulting in losses on disposals of £426m, broadly offset by accelerated fair value unwind of £399m. While the treasury asset disposals will result in lower future fair value unwind, these transactions have provided significant funding flexibility, the group said.On a positive note, the group said it is making "continued strong progress" on the integration of HBOS, with annual run-rate cost savings running at £1.57bn per annum at the end of March. The group says it is on track to deliver £2bn of cost synergies per year by the end of the year.Driven by deposit growth, the aggregate of core customer loans and advances and deposits increased from £842.0bn at the year end to £847.8bn at 31 March 2011 with the mix impact improving the core loan-to-deposit ratio to 116%.There was a substantial reduction in liquidity support from government and central bank facilities of £26.2bn in the first quarter to £70.4bn, facilitated by non-core asset reductions, strong deposit growth, and funding progress.The group's core tier 1 ratio, which is a measurement of balance street strength, was down to 10.0% from 10.2% at the end of 2010, reflecting the effect of a statutory loss, partially offset by a reduction in risk-weighted assets of £15bn. ---jh