Lloyds Raises Outlook on Improving U.K. Recovery From Covid

(Bloomberg) -- Lloyds Banking Group Plc beat forecasts in the second quarter and lifted its guidance for the year as it released further provisions it had set aside for loans going bad during the pandemic.

Pretax profit of 2 billion pounds ($2.8 billion) came in ahead of analyst expectations for 1.4 billion pounds, according to a consensus compiled by Bloomberg, and compares to a loss in the same period last year. The bank released 333 million pounds from its loan loss provisions, more than expected.

“During the first six months of 2021, the group has delivered a solid financial performance with continued business momentum, bolstered by an improved macroeconomic outlook for the U.K.,” said Chief Financial Officer William Chalmers, who’s also interim chief executive before HSBC Holdings Plc’s wealth head Charlie Nunn takes over in mid-August.

Lloyds also said Thursday it would pay an interim dividend worth 0.67 pence after the Bank of England removed restrictions imposed at the height of the pandemic to make sure lenders could weather deep losses.

Shares in the London-based bank rose as much as 2.4% in early trading.

Loan Demand

Britain’s biggest mortgage lender said demand for home loans continued to strengthen, boosting its open mortgage book by 2% in the quarter to almost 290 billion pounds.

For the rest of the year, Lloyds has upgraded its outlook, citing the vaccination program and end of lockdown restrictions. The new guidance, which comes just three months after the bank last raised its expectations, includes:

• net interest margin to reach 250 basis points, up from 245
• full year impairment charge to be “materially lower”
• return on tangible equity to be about 10%, up from 8.5% to 10%
• operating costs to be about 7.6 billion pounds, up from 7.5 billion pounds.

The company also confirmed it was buying savings group Embark for 390 million pounds, in a move that will boost its online services for mass-affluent customers. Lloyds said the deal meant it could raise its targets for new money over the next two years, to 40 billion pounds from 25 billion pounds previously.

The results come a day after rival Barclays Plc reversed some of its bad loan charges as the U.K. economy starts to bounce back from more than a year of disruption. Lloyds began to unwind its provisions in April.

British lenders initially set aside more than 17 billion pounds as the pandemic triggered the country’s steepest recession in three centuries, yet government support programs have so far kept widespread defaults at bay. The country dropped curbs on socializing earlier this month and is opening its borders to vaccinated travelers.

What Bloomberg Intelligence Says:

Lloyds Banking Group’s comfortable 1H earnings beat, coupled with upgrades to key 2021 guidance and a small investment platform purchase -- Embark, consuming 10 billion pounds of assets and 30 bps of CET1 -- should support sentiment. Higher costs may be more than offset by wider consensus margins, revenue and profit as provision expectations also continue to be cut.

-- Jonathan Tyce, BI banking analyst

Lloyds saw encouraging early signs in the Bounce Back Loan Scheme, which was set up to support small businesses, with fewer than 10% of customers due to repay in arrears.

The bank also said Thursday it was expecting about about 80% of its staff to adopt hybrid working practices as the lender embraces the shift to flexible work.

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