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Lloyds Banking Group PLC facing near perfect storm of challenges, say analysts


Analysts at Shore Capital, however, encouraged investors to look through this disappointing set of results and “reflect on the strength of the balance sheet and scope for profits to improve materially in future as the economy recovers”

PLC () is facing a near “perfect storm” of challenges, according to analysts, and glimmers of hope are “few and far between”.

Heading into the results, the consensus forecast had been for a negligible loss of £13mln, having announced an adjusted £558mln profit in the first quarter.

But Britain’s biggest mortgage lender swung to an underlying loss before tax of £839mln in the first half of the year, which was worse than investors and the City expected.

“This is primarily due to much higher than expected impairments as the group has adjusted its macro-economic assumptions to reflect a more challenging outlook,” said analyst Gary Greenwood at Shore Capital, with Lloyds lifting bad loan impairment charges by £2.4bn to £3.8bn.

A statutory loss before tax of £676mln, which compared to expectations of a £31mln loss, saw a further drag from £70m of restructuring charges and £233mln of gains related to market volatility and other items.

Greenwood added that Lloyds earlier assumptions “seemed optimistic” and pointed out that much of the additional provision obtain transitional relief “so there is a delayed impact to capital”.

Richard Hunter, head of markets at Interactive Investor, said: “The current environment is proving to be a hard slog for Lloyds, and the difficulties are unfortunately set to continue.

“Since its last update, Lloyds estimates that the economic outlook has deteriorated further, partly because of the immediate impact of the pandemic in its second quarter, but also due to the likelihood of significantly higher defaults on loans in the next few months as various government support schemes subside.

“The wider challenges are exacerbated given the bank’s perceived status as a barometer of the UK economy. With GDP growth remaining under pressure and the unemployment rate potentially yet to peak, the uncertainty around Brexit negotiations takes on additional significance given an already faltering economy.”

More cautious than Barclays

UBS analyst Jason Napier said Lloyds’ new guidance “looks cautious when compared with Barclays”, which released results a day earlier.

FTSE 100 rival Barclays had issued what felt like a cautious outlook for the second half of the year, stressing its dependence on a strong recovery in developed economies such as the US and the UK, where unemployment remains a major concern.

Barclays said the second half of the year is expected to continue to be challenging, but said impairments were expected to be below those in the first half, which were increased by £1.6bn in the second quarter to £3.7bn, and that its investment banking arm was “well positioned”.

Lloyds, on the other hand, which does not have an investment bank, said investors should not expect a near term recovery for income.

Like Barclays, it expects loan losses will also be less than the first half, guiding to a total of £4.5bn-£5.5bn, with stable net interest margin, costs below £7.6bn and risk-weighted assets flat to “slightly up” on the first half. 

“Lloyds is, by and large, a bread and butter bank,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“It takes deposits and makes loans – cross selling wealth management, pension and insurance products on the side. Unfortunately it’s the core lending business which has been hit hardest by the current crisis.”

With lower interest rates squeezing loan profitability, together with a massive shift in the loan book away from profitable consumer lending and towards less lucrative commercial lending through government support schemes, Lloyds has little elbow room.

“While some of the headwinds elsewhere in the bank, such as insurance…



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