Mis-selling provisions keep Lloyds in the red

Part-nationalised lender Lloyds Banking Group is setting aside yet more money to cover possible pay-outs relating to the mis-selling of payment protection insurance (PPI) schemes, meaning it stayed in the red at the half-year stage.The group reported a statutory loss per tax of £439m for the first half of 2012, a substantially smaller loss than the £3,251m booked in the first half of last year.The group made a provision for contact and redress in relation to legacy PPI business totalling £1,075m in the half year, with £770m of that added in the second quarter, as a result of an increase in the volume of complaints being received, while the costs of the bank's Simplification programme and the disposal of hundreds of branches to the Co-op (project Verde) put a £513m dent in profits.The group's underlying profit increased by £715m from a year earlier to £1,064m, as a reduction in write-downs offset a decline in underlying income. Underlying income, net of insurance claims, reduced by 17% compared to the same period in 2011, driven mainly by further non-core asset reductions and subdued demand for new lending, and by a lower banking net interest margin, which declined as expected by 19 basis points (19/100 of a percentage point) to 1.93%, as wholesale funding costs increased.The group's results announcement runs to 189 pages of A4 paper, and includes reports on both the core and non-core parts of the business; the non-core portfolios essentially consist of businesses Lloyds would rather not own, although, pointedly, the Project Verde branches which the bank recently agreed to sell for a song to the Co-operative Group at the insistence of the European Community, are included in the core business figures. Core businessCore underlying profit was down 7% to £2,977m from £3,208m the year before, as a result of underlying income falling 11% to £8,602m from £9,704m, with the core margin reducing by 11 basis points to 2.32%. Impairment charges relating to the core business fell below the billion pound mark to £978m from £1,636m.The group is making progress in reducing its cost base, with total costs for the core business 4% lower at £4,647m from £4,860m the year before. "We remain on track to deliver annual run-rate cost savings of £1.9bn by the end of 2014," Chief Executive Officer António Horta-Osório revealed.Turning to the painful issue of PPI provisions, Horta-Osório said that after increasing these by £375m in the first quarter of 2012 it has been deemed necessary to bump the figure up by a further £700m in the second quarter, bringing the total estimated cost of redress to a staggering £4,275m.As for the group's capital position, Horta-Osório noted that this continues to strengthen, with the core tier 1 ratio - defined by the Financial Times as "the money that the bank has in its coffers to support all the risks it takes" - increasing by half a percentage point in the first half of the year to 11.3%.Impairments outlook improvingThe bank said it remains on track to meet the full-year guidance given in February. Following a better than expected performance in the first half, and assuming current economic trends continue, Lloyds now anticipates that its 2012 impairment charge will be lower than previous guidance, in spite of decreasing non-core assets by more than originally anticipated. "We are also targeting achievement of a long-term loan to deposit ratio of 120 per cent by end Q1 [first quarter] 2013, and now expect our non-core assets to reduce to below £70bn by the end of 2014, with non-core reporting to cease at that time," Horta-Osório said.Initial reaction to the update was muted but positive. The shares rose 0.27p to 29.56p in the first hour of trading.