Lloyds moves back into profit, despite another rise in impairments

The last ten years have been difficult ones for banks in general, and 2020 has been no different, though the recent Q3 numbers from the major US banks, as well as Barclays and HSBC offered some hope for the beleaguered sector with profits which beat expectations across the board.

Sadly, for the Lloyds Banking Group share price, which has been on the rise since its September lows, the boost that accompanied the release of Barclays and HSBC’s numbers looks to be a little lacking when it comes to the release of today’s Q3 numbers.

This is because, unlike its bigger peers, Lloyds doesn’t have the luxury of an investment banking arm to help offset its much more domestic focus, with the sector not only having to contend with Brexit, but the fallout from the coronavirus pandemic.

This means that unless it can generate a decent return from its primary business of lending, it is likely to struggle, even though it has managed to cut costs quite drastically over the past few years. In response to pressure from the Bank of England the bank also suspended the dividend, having curtailed its buyback program at the end of 2019. 

Despite the more difficult trading environment, today’s Q3 numbers are better than expected, having come off the back of the Q2 numbers which saw the bank push up its estimate of total loan losses for the year to £5.5bn.

In its Q2 numbers the bank set aside another £2.4bn, on top of the £1.4bn in Q1, as the bank posted a statutory first half loss of £602m, with £676m of that coming in Q2.

Net income came in at £3.4bn a fall of 19%, from the same period a year ago, though mortgage applications came in at their best levels since 2008, which gives a decent indication as to how lower margins have impacted profits for banks across the board.

Statutory profits before tax for Q3 have come in at £1.04bn, while the bank set aside another £301m in respect of non-performing loans, which was slightly lower than expected, bringing the total provisions year to date to £4.1bn.

More encouragingly the bank revised its estimate for full year loan losses to the lower end of a £4.5bn to £5.5bn range, however this could well change if the UK follows France and Germany into another lockdown in the next few weeks.   

One of the main reasons for the slide in profits in Q2 was the slide in the net interest margin for Q2 from 2.79% to 2.4% as lower interest rates ate into the banks’ ability to generate income.

This has stabilised in Q3 to 2.42%, despite all the recent chatter from the Bank of England about a possible negative rate policy, with the bank saying that they expected this to remain stable into year end.

The outlook still remains highly uncertain, and while the revision lower for loan losses was encouraging another, or multiple lockdowns, could change the picture markedly.

To give an idea of how this picture could change one only needs to look at the number of payments holidays the bank granted since the March lockdown. On mortgages that number came in at around 477k, equating to customer balances of £62.7bn, as well as 320k payment holidays on credit card balances. A large majority of these payment holidays have matured with 83% of the mortgage holidays resuming payments, and 13% extended. On the credit card front only £200m of credit balances are still in the extension phase. 

If we get another lockdown this number is likely to go up again, particularly now that furlough is ending, and the job retention scheme is changing.