ii view: Lloyds Bank bad debt provision soars, shares slide

The financial crash, PPI and now Covid-19. Should investors remain patient?

First-quarter results to 31 March 2020

• Impairment provision up over 400% to £1.43 billion
• Statutory pre-tax profit down 95% to £74 million
• Decision to suspend the dividend previously announced
• Capital cushion up to 14.2% from 13.9%

Chief executive António Horta-Osório said:

“The coronavirus pandemic presents an unprecedented social and economic challenge which is having a significant impact on people and businesses in the UK and around the world. Our financial strength and business model enables us to play a significant role, together with Government, regulators and other authorities, in helping the country manage through this crisis supporting our customers and the UK economy. 

“In our 250 years of serving the British economy we have experienced many downturns and several crises and on each occasion we have worked hard to contribute to the recovery of the economy. We expect to do exactly the same this time.”

ii round-up:

Lloyds Banking Group (LSE:LLOY) is home to household brand names including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.

In the wake of the 2008 financial crisis, Lloyds has restructured to become a UK-focused bank with around 26 million customers.  

In 2019, the bank announced its intention to switch and start paying dividends on a quarterly basis in 2020, only to recently suspend payments given regulatory pressure under Covid-19. 

For a round-up of these first-quarter results, please click here.

ii view:

Lloyds has come a long way since the financial crisis, and its return to the relatively dull and sturdy bank it once was appeared complete. In 2019, a line finally looked to have been drawn under its PPI provisioning, while Brexit was again kicked into the distance. 

With online banking and a repositioning of its asset management proposition in its sights, along comes Covid-19 to muddy the outlook. 

For investors, Lloyds' exposure to the UK economy and the hit from Covid-19 now provide the key risk. These latest results have seen it take a major bad debt provision. But with the uncertainty as to how long the economy could remain in partial shutdown, it could be just the start. Long-term shareholders will likely remain loyal, but, with the attraction of the dividend removed due to regulatory pressures, new investors might adopt a wait and see approach. 

Positives

• A tight rein on costs
• Improved capital cushion

Negatives

• Dividend payment suspended
• Mortgage and credit card activity fallen

The average rating of stock market analysts:

Buy