Lloyds Profit Jumps While Missold Insurance Costs Linger

(Bloomberg) -- Lloyds Banking Group Plc is quickly gaining earnings momentum, but is still looking over its shoulder to clean up its troubled past.

Britain's largest mortgage lender posted a 23 percent jump in pretax profit for the second quarter, beating analyst estimates, and also upgraded its financial guidance for the full year. It's also taking a 460 million-pound charge ($602 million) to compensate customers for improperly sold loan insurance, Lloyds said in its earnings statement Wednesday.

“The only notable fly in the ointment” is a further payment protection insurance provision taken during the second quarter, said Gary Greenwood, an analyst at Shore Capital, in a note to investors. “Overall, we expect this statement to be taken positively by the market.”

The bank's shares climbed 1.9 percent in early morning trade in London.

After restoring the bank to full private ownership, Chief Executive Officer Antonio Horta-Osorio is investing 3 billion pounds to boost technology and income from insurance and retirement products, while striving to keep a lid on expenses. Lloyds is aiming for a cost-to-income ratio in the low 40s, which would make it one of the most efficient European banks.

Lloyds said pretax profit climbed to 1.52 billion pounds in the second quarter from 1.24 billion pounds a year ago. Net interest income climbed just under 6 percent to 3.17 billion pounds for the quarter.

The latest PPI top-up in the second quarter raises the total set aside for the scandal by the London-based bank to more than 19 billion pounds. Analysts at Morgan Stanley expected a charge of 410 million pounds for the second quarter, according to a note.

The bank, which had around 70,000 staff as of the end of June, has shrunk from about 99,000 employees in 2011, the year Horta-Osorio became chief. The former Banco Santander SA executive has reduced costs, closed branches and eliminated jobs as the company invests in digital technology. The lender has resumed paying dividends and announced a 1 billion-pound share buyback in February.

Payment Protection Insurance

Lenders in the U.K. have already set aside almost 40 billion pounds to compensate customers who were improperly sold payment protection insurance, with Lloyds paying out the most so far. A recent ruling by a local English court and a new proposal from regulators to broaden the scope of claims raise the prospect of further pain for the banks.

Payment protection insurance has been lingering as an issue as consumers have until August 2019 to make a complaint. It was often sold using aggressive tactics and in the worst cases, banks misled customers by telling them that PPI was mandatory for loans. In other scenarios, it was sold without giving clients a full explanation of what it would cover.

To contact the reporter on this story: Stefania Spezzati in London at sspezzati@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Andrew Blackman

©2018 Bloomberg L.P.