Funding costs drive Lloyds to slash loan book
LLOYDS has taken an axe to its balance sheet in order to cut its reliance on increasingly expensive wholesale funding, the bank revealed yesterday.
Markets welcomed the speedy shrinkage of the bank’s loan book as well as a signal from chief executive António Horta-Osório that he is keen to start paying a regular dividend and is only waiting to get clarity on new regulations, due in June. Shares in the part-nationalised lender were up by 8.4 per cent by the end of the day.
Lloyds unveiled an eight per cent drop in its need for wholesale funding in the first quarter, which now stands at £231bn and meets its targeted loan-to-deposit ratio of 130 per cent. The progress was so rapid that Horta-Osório set a new target of 120 per cent for this time next year.
Deutsche Bank analysts said: “Wholesale funding is falling very quickly which reduces risk and will reinforce shareholder returns over time.”
The change was fuelled by a five per cent cut in lending to retail customers during the first quarter of this year, with retail assets reduced to £538bn, and a slight increase in customer deposits to £412bn.
But despite scaling back its lending to retail customers – mostly by cutting mortgage lending – the bank was keen to emphasise its increase in business loans. Net commercial lending is up by four per cent on last year despite what Horta-Osório called a “subdued UK economic environment”.
But many analysts were disappointed by a drop in the bank’s net interest margins – the average margin it makes on lending – which was down by two basis points to 1.95 per cent due to increased funding costs, a key reason why the bank is deleveraging so quickly.
Its bottom line was also hit by an additional £375m provision to compensation customers mis-sold payment protection insurance, bringing the cost of the scandal to £3.6bn so far for Lloyds. The PPI hit brought its pre-tax profits to below expectations, at £288m. That was nonetheless a welcome return to positive territory versus a £3.5bn loss during the same period last year.