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Lloyds Profit Tumbles After Taking New PPI Hit

Stephen Little, Reporter , London, 31 July 2014

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Lloyds Banking Group said half-year profits fell as the bank, partly owned by the UK taxpayer, set aside further money to handle payment protection insurance mis-selling compensation. Underlying profits rose.

Partly-state owned Lloyds Banking Group has reported a slump in profits after it revealed that it set aside a further £600 million ($1.01 billion) to deal with Payment Protection Insurance mis-selling. The news comes on top of the $370 million fine by UK and US authorities earlier this week for the manipulation of LIBOR and other benchmark failings.

Lloyds Banking Group saw its profits before tax plummet by 59.5 per cent to £863 million for the six months to the end of June, compared to the same period a year ago. The firm said that underlying profit rose 32 per cent to £3.82 billion compared to the first half of 2013.

Lloyds said in a statement that this fall was a result a £1.1 billion charge for “legacy issues” including further provision for PPI of £600 million, and a £226 million charge relating to the settlement of LIBOR and BBA repo rate issues.

Although Lloyds did not go into detail, the group recorded a fall in its wealth management arm of 6.2 per cent to £3 billion, down from £3.2 billion at the end of December.

Shares in Lloyds were down 2.74 per cent by mid-morning to 74.32 pence. At the close yesterday, they were 76.41 pence.

Further provisions include £50 million for interest swaps mis-selling, bringing the amount provided up to £580 million, and £225 million for ongoing regulatory issues such as PPI.

This brings the total amount provided for PPI to £10.4 million, of which approximately £2.19 million relates to anticipated administrative expenses.

While the volume of PPI complaints continues to fall, they were higher than forecast and, as a result the group is forecasting a slower decline than previously expected, with the increased provision accounting for an extra 155,000 complaints at a cost of approximately £260 million.

The common equity tier 1 ratio increased to 11.1 per cent from 10.3 per cent at the end of 2013, while the Basel III leverage ratio improved to 4.5 per cent. The loan to deposit ratio improved to 109 per cent, down from 113 per cent at the end of 2013.

“As the UK economy normalises, the benefits of the strategic decisions we made in 2011 are now being seen. In the first half of 2014 we increased income and grew lending in our key customer segments, while reducing our cost base and impairments substantially. The 32 per cent increase in our underlying profit, and the increase in our fully loaded common equity tier 1 ratio to 11.1 per cent from 10.3 per cent pro forma at the end of 2013 while addressing a number of legacy issues, demonstrates the strength of the business model we have created,” said group chief executive António Horta-Osório.

Charges

Earlier this week, Lloyds Banking Group was fined $370 million by UK and US authorities for the manipulation of LIBOR and other benchmark failings.

The fine includes $105 million by the Commodity Futures Trading Commission, approximately $178 million by the UK Financial Conduct Authority and $86 million from the US Justice Department.

The manipulation of submissions covered by the settlements took place between May 2006 and 2009. Lloyds said in a statement that the individuals involved have either left the group, been suspended or are subject to disciplinary proceedings.

The FCA’s fine is the joint third-highest ever imposed by the regulator or its predecessor, the Financial Services Authority, and the group is the seventh company to be fined by UK and US authorities in the LIBOR-rigging investigation.

Lloyds was bailed out by the British government in 2008 following the financial crisis to save it from collapse and has been partly-owned by the British taxpayer ever since.

The penalty for Lloyds comes two years after Barclays was fined $450 million by US and UK regulators for trying to manipulate LIBOR, which led to the resignations of Barclays' chief executive Bob Diamond and chairman Marcus Agius in the UK.

Following the LIBOR scandal in 2012, a number of other banks were also fined, including UBS and Royal Bank of Scotland, for fixing the rate in order to boost the profits of traders prior to the financial crisis.

At the end of last year, the European Union also levied a record fine of €1.7 billion ($2.3 billion) on six European and US banks, including Deutsche Bank, Societe Generale, Royal Bank of Scotland, and Citigroup.

LIBOR is based on the interest rates leading banks charge when loaning money to other banks overnight, which is supposed to represent the cost of a bank's lending activities.

As the primary benchmark for short-term interest rates globally, LIBOR is used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer-lending products.

The scandal arose both during and before the financial crisis when it was discovered that banks were manipulating rates so as to profit from trades or give the impression they were more credit-worthy than they actually were.

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