The first quarter of this year did not bring good news for Lloyds Banking Group as it was hit by heavy losses caused by exposure to Ireland and potential compensation payouts.
Lloyds reported a statutory pre-tax loss of £3.47 billion in the first three months of the year, compared to a profit of £721 million a year ago.
The bank, which is 41%-owned by the British taxpayer, said its figures reflected a £3.2 billion provision made for potential compensation payouts to customers who took out payment protection insurance (PPI). This follows April's judicial review which went against the UK banks.
Lloyds also took a charge of £1.1 billion to allow for further falls in commercial property prices in the Irish Republic.
In total, the bank saw its bad debt losses increase to £2.6 billion, up £0.2 billion on the same period last year but down from £3.8 billion in the previous quarter. It said the first quarter hit was £500 million more than it expected, mainly due to Ireland but added that "the impairment charge in the remainder of our portfolio overall was in line with expectations".
Impaired loans increased by 3% to £66.3 billion, representing 11% of closing advances, principally driven by a further increase in impaired loans in Ireland. Lloyds said that it is are now allowing for further potential falls in Irish commercial real estate prices of approximately 10%.
On a positive note, its pre-tax profit was £284 million before the PPI provision and other one-off items and the core business of the bank grew, with customer loans and deposits increasing from £842 billion to £847.8 billion at 31 March 2011 with the mix impact improving the core loan-to-deposit ratio to 116%.
Lloyds said it was also making continued strong progress on the HBOS integration, with significant annual run-rate cost savings running at £1.57 billion per annum at the end of March. The figures indicate that the bank is on track to deliver £2 billion of cost synergies per year by the end of the year.
There was a substantial reduction in liquidity support from government and central bank facilities of £26.2 billion in the first quarter to £70.4 billion, 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% 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 £15 billion.
The Financial Services Authority (FSA) published guidelines last year which said banks should contact all past PPI customers and invite them to complain if they thought they had been mis-sold PPI. This was challenged by the banks and spent many months going through the courts until a High Court judge rejected the challenge last month.
After discussion with Britain's financial watchdog, Lloyds said "there are certain circumstances where customer contact and/or redress will be appropriate," even though there remains uncertainty. It could see rivals also make big provisions.
The results were the first presented by new Lloyds chief Antonio Horta-Osorio, who replaced Eric Daniels on 1 March.
He confirmed that the bank would not be involved with any industry appeal against the ruling and its provision should "draw a line under the issue". Its controversial acquisition of HBOS leaves the Lloyds group more exposed to PPI claims than any other in the banking sector.
Lloyds added that "Financial Services Compensation Scheme (FSCS) costs in respect of certain investment company failures have now started to emerge and, although relevant costs cannot be predicted, we expect that during the course of 2011 the group will be required to make contributions towards such costs as required by the FSCS."
This article was written for our sister site Interactive Investor