Lloyds Banking Group plunged to a second-quarter loss after putting aside £2.4bn for bad debts, saying the economic impact of the Covid-19 lockdown was “much larger than expected”.
Britain’s biggest high street lender reported a loss of £676m for the three months to June, down from a £1.3bn profit during the same period last year. Analysts had been expecting a loss of £31m.
It came after the bank took a loan loss provision of £2.4bn, as it readied itself for a surge in defaults in the coming months. Lloyds said the charge reflected the “significant deterioration in the economic outlook during the quarter”.
Business and personal customers are expected to struggle to keep up with payments as the pandemic drags on and coronavirus support programmes, such as the government’s furlough scheme and state-backed loans, are wound down.
Lloyds, which is the UK’s largest mortgage lender, said the UK’s economic performance “remains uncertain and largely dependent on how Covid-19 transmission responds as the economy gradually reopens”.
“The outlook has clearly become more challenging since our first-quarter results, with the economic impact of lockdown much larger than expected at that time,” said the bank’s chief executive, António Horta-Osório.
The bank’s central forecast predicts a 10% drop in UK economic growth in 2020, with the jobless rate peaking at 9% in the fourth quarter. Its worst-case scenario would see unemployment jump to 12.5% by the second quarter of 2021 and gross domestic product fall by 17.2% this year.
The latest provision adds to the £1.4bn charge that Lloyds booked in anticipation of losses related to Covid-19 in the first quarter. It brings the bank’s total credit impairment charge to £3.8bn for the first six months of 2020.
Lloyds, which is seen a bellwether for the UK economy as it is one of the most domestically focused banks, said it expects impairments to total £4.5bn to £5.5bn by the end of the year.
“The negative economic impact remains profound and we have revised our expectations accordingly,” Horta-Osório said.
He added that the bank’s support for customers would come at a cost for the bank but that this was an “investment” in the bank’s future.
“We are, of course, aware that the support we are providing to our personal and business customers to help them through the current crisis will have a cost to the group. We believe this is the right thing to do, as supporting our customers directly aids the recovery of the economy from which we benefit. We view this as an investment in the business.”
Lloyds also suffered a 17% drop in net interest income – which measures the difference between interest earned on loans versus paid on deposits – to £2.5bn after UK interest rates were cut to a record low of 0.1% in March.
The company’s shares dropped 8% to 26p after the results. Like other UK lenders, Lloyds has seen its price drop significantly since February, when its shares were trading at 58p.
On Wednesday, Barclays reported a 75% plunge in quarterly profits, to £359m, after putting aside £1.6bn to cover bad debts.
Standard Chartered released its second-quarter results on Thursday, showing pre-tax profit falling 37% to $741m (£570m) after taking a $611m (£470m) loan impairment charge.