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Lloyds First Half Losses Are Really Gains

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Investors responded fairly well to Lloyds Banking Group’s (LSE:LLOY) first half report, even though the company reported a net loss of £676 million.  Share price was up 0.32 pence to 29.60 by 1:00 pm, having peaked at 29.86 at the noon hour.

No Magic Wands

With the problems facing the banking sector in general and Lloyds in particular, every stakeholder from the CEO to the smallest investor must sometimes wish that they had a magic wand that could be waved over the whole mess and turn the pumpkin into a royal carriage.  Unfortunately, this is not a fairy tale, and there are seldom magic wands in nightmares.

The only way to extract themselves from the problems that precipitated the taxpayer bailout is with a sound strategic plan and a determined leadership that, together, can regain and retain consumer confidence.  The facts released in the 189 page report this morning indicate that the plan is being successfully implemented and that the company is on track to regain a profit position.  But that does not mean that the road so far has been a smooth one.  Nor does the road ahead appear to be without its own potholes, twists and turns.

Making Silk Purses

About the only way you can make a £676 million loss look good is to have had a much bigger loss the previous year, and that exactly the case.  In fact, the loss for the first six months is a 70% improvement over the £2.31 billion loss taken for the same period last year.  Pre-tax loss improved to £439 million versus £3.25 billion last year.  Total revenue for the period was down slightly to £16.25 billion from £16.52 billion year-on-year.  This “disparity” is largely due to one-off expenses taken to meet regulators’ requirements within the required time frames as well as some self-imposed actions intended to reap long-term rewards.

One of the biggest burdens Lloyds has had to face is the effect of the mishandling of PPI.  Already having been hit with £4.26 billion in claims and administrative costs, the bank has set aside £700 million in reserve to cover anticipated additional claims.  The bank took at least a £700 million bath on the mandated sale of the 632 Verde group branches to Co-Op.  Caught between a rock and a hard place, Lloyds was faced with a deadline to dispose of the branches during a period that is definitely not a seller’s market.

CEO António Horta-Osório said that Lloyds is on track to meet its 2012 targets.  Part of meeting those targets includes continuing to divest non-core assets.  The bank trimmed £23 billion in non-core assets in this reporting period.  There are £118 billion remaining on the balance sheet.  The bank intends to trim another £48 billion by 2014.

Although it is likely that Lloyds will come under the scrutiny of the LIBOR probe, Horta-Osório indicated that the bank is working with regulators whilst conducting an internal audit, but so far has found no reason to set aside any reserves for potential penalties.

And, of course, Lloyds faces the over-arching problem of operating in a flagging economy, which only exacerbates any other issue the company faces.  Horta-Osório said that, “Lloyds is suffering as the British economy continues to stutter. The combination of low interest rates, slack demand for loans and increased regulatory pressure has weighed on the bank’s share price in recent months.  (However,) We are on track to deliver our strategic aims, and we are making significant progress with our financial targets.”

Company Spotlight

Lloyds Banking Group is the largest retail bank in the UK.  The Lloyds Banking Group was established in 2009 from the consolidation of several popular banking brands, including Lloyds TSB, Scottish Widows, Halifax, and the Bank of Scotland.  With over thirty million customers, one third of the people in the UK bank with Lloyds.

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