Lloyds debt provision up £2.4bn as profits plunge on grim outlook

That took impairment charges to £3.8bn in the first half, up from £579m in 2019, with the bank forecasting a full-year figure of between £4.5bn - £5.5bn as government employment and business support schemes wound down and the economy entered a forecast recesssion.

The lender booked a pre-tax loss of £602m compared with a profit of £2.9bn a year ago. Net income fell 11% to £5.4bn. Second quarter revenues fell 21% to £3.5bn, hit by lower demand and weaker interest rates.

Net interest margin, the difference between rates on savings and loans, fell 31 basis points to 2.59%, reflecting the lower rate environment, actions taken to support customers, including free overdrafts, and a change in asset mix partly as a result of reduced levels of customer demand during the coronavirus pandemic.

The margin fell 39 basis points to 2.40% in the second quarter, including a 21 basis point impact from lower interest rates.

“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,” Lloyds said on Thursday.

"The outlook has clearly become more challenging since our first quarter results, with the economic impact of lockdown much larger than expected at that time."

"With the gradual easing of social distancing measures we have more recently seen consumer spending levels increase, housing market activities reawaken, and the economy return to growth in May and June. However, the negative economic impact remains profound and we have revised our expectations accordingly."

BLEAK ECONOMIC PICTURE

Lloyds became the latest bank to paint a bleak picture of the economic future. On Wednesday, Spain's Santander fell to a €11.1bn second quarter loss wrote down the value of its UK unit by 85%, while rival UK lender Barclays reported higher-than-expected bad debt provisions.

Lloyds’ scenario modelling for estimating future credit losses was now based on the UK unemployment rate reaching 9% in the fourth quarter of 2020 "and more sustained reductions in asset prices".

Hargreaves Lansdown equity analyst Nicholas Hyett said the long term challenges of low interest rates and anaemic economic growth would linger, even as other headwinds, such as insurance sales and consumer borrowing, looked set to diminish as lockdowns come to an end.

"However, there are some bright spots. The bank’s early move into digital services has served it well, and has historically given it one of the lowest cost to income ratios in the industry – a competitive edge in bad times. The growing Wealth & Insurance business also provides diversification, and is less sensitive to low interest rates than the core banking operation."

He added that "Lloyds should ultimately weather the current storm with its attractive high street franchise intact. How long the storm lasts though is unclear, and the longer the disruption continues the longer it will take for Lloyds to get back on its feet.”

Interactive Investor head of markets Richard Hunter said the results "make for difficult reading".

"Even prior to today’s share price decline, a loss of 50% over the last year, as compared to a drop of 20% for the wider FTSE100, was indicative of the market trying to price in the sheer scale of the challenge which Lloyds faces."

"Reasons for optimism on shorter-term prospects, it appears, will need to wait for another day. In the meantime, it remains to be seen whether the market consensus of the shares as a buy, and indeed having recently moved to being the preferred play in the sector, will come under some serious review.”