Lloyds Bank’s Huge Loss Tied to Insurance Sales

February 27, 2012

U.K. high street lender Lloyds Banking Group on Friday posted a 2.8 billion pound ($4.4 billion) loss for 2011 after it set aside 3.2 billion pounds ($5 billion) to compensate customers who had been miss-sold payment protection insurance (PPI).

The group’s share price fell as it warned that income was likely to be lower this year and that it would miss some of its medium-term targets.

The PPI policies are designed to protect loan payments in the event of the borrower losing employment or cannot work, but they were sold to self-employed and unemployed people who would not have been able to claim, and a court has ruled last month that the banks were at fault.

Lloyds, in which UK taxpayers hold a 41 percent stake following the 2008 financial crisis, said its net loss for the year widened to 2.8 billion pounds from 320 million pounds a year earlier. The result was worse than expected and the company’s share price was trading 2.6 percent lower in London at 36 pence.

Income was down 17 percent to 20.8 billion pounds. Pretax profit on its core operations rose 3 percent to 6.3 billion pounds.

Despite the ballooning loss, Chief Executive Antonio Horta-Osorio insisted that the group “is now in a significantly stronger position than it was 12 months ago.” Over the past year, he noted that the group has disposed 53 billion pounds of noncore assets as well as raising its Tier 1 capital ratio β€” a key gauge of underlying financial strength β€” from 10.2 percent to 10.6 percent.

However, he warned that the external environment remained “challenging” in 2012, “with a subdued economy, continued high levels of regulatory scrutiny and political uncertainty relating to the banking sector, and the continued potential for downside effects from financial market volatility and instability in the eurozone.”

Lloyds also reduced its bonus pool by 30 percent to 375 million pounds.

As previously announced, Horta-Osorio is not accepting a bonus for 2011, and the bank announced earlier that it is reducing deferred share payments for 13 past and present directors and executives, including former chief executive Eric Daniels, because of the payment protection insurance issue.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said the bank’s outlook comments “provide little reassurance, with the company predicting a similarly tough year ahead as they continue to concentrate on tidying up the balance sheet.”

It was third downbeat earnings report from Britain’s biggest banks.

On Thursday, Royal Bank of Scotland β€”in which taxpayers have an 82 percent stake β€” reported a worse-than-expected net loss of 2 billion pounds ($3.1 billion) for 2011, compared with a loss of 1.13 billion pounds the previous year. Income was down 11 percent to 26.6 billion pounds largely because of a 25 percent fall in revenue at its global banking and markets division.

Barclays earlier announced a 15 percent fall in 2011 net profit to 3 billion pounds.

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