Lloyds Banking Group fell to a loss in the second quarter, after warning that the UK’s lockdown had had a “much larger than expected” impact on the economy.
The UK’s largest retail bank put aside a further £2.4bn to deal with expected customer defaults, up from £1.4bn in the first three months of the year. There was a particularly large jump in provisions for soured mortgage loans, which the bank blamed on an “additional reduction in house price forecasts” since its last trading update.
The bank slumped to a pre-tax loss of £676m in the second quarter, compared with a pre-tax profit of £1.3bn a year ago.
António Horta-Osório, Lloyds chief executive, said the pandemic had had a “profound” impact on the global economy, with Lloyds becoming the latest in a string of banks to report weaker-than-expected results this week.
On Wednesday, Santander fell to a €11.1bn loss in the second quarter and wrote down the value of its UK subsidiary by 85 per cent, while UK lender Barclays’ net profits dropped 91 per cent due in part to higher than expected loan loss provisions.
While government support schemes and repayment holidays have so far kept customer default levels relatively low, banks are bracing for a sharp increase later in the year as businesses struggle to adapt and the end of furlough schemes drives up unemployment rates.
Mortgages had largely been excluded from the first wave of coronavirus-induced loan loss provisions earlier this year, but the announcement from Lloyds on Thursday follows a similar report from smaller rival Virgin Money, which warned on Monday about the impact of rising unemployment.
Lloyds’ “base case” scenario used for estimating future losses now assumes the UK unemployment rate will reach 9 per cent in the fourth quarter of 2020, worse than the most severe downside scenario it considered at its last set of results in April.
However, Mr Horta-Osório said he was “very comfortable with our mortgage book” because the bank had consciously slowed down growth in mortgages after growing cautious about “exaggerated” house prices in recent years.
Lloyds added that it had seen some signs of improvement in recent weeks, with rising levels of consumer spending and housing market activity. However, the bank said the outlook “remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year”.
Overall revenues at the bank for the three months to June fell 21 per cent year on year, to £3.5bn, with lower demand and lower interest rates both weighing on income. Operating costs fell 6.5 per cent.
The results pushed Lloyds shares down more than 8 per cent in early trading. However, while the second-quarter provisions were higher than expected, analysts noted that the bank was slightly more optimistic about the outlook for the rest of the year, forecasting full-year impairments of between £4.5bn and £5.5bn, in line with previous forecasts.
Gary Greenwood, analyst at Shore Capital, said: “While Q2 represented an awful set of results, we think this could be a nadir in terms of quarterly profitability, with economy activity starting to improve and significant forward-looking provisions already set aside.”