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LONDON — Lloyds Banking Group PLC shares rose sharply Wednesday after the part-nationalized bank reported a smaller-than-expected loss for the first half of the year and declared its belief that the worst was over.
Lloyds blamed loan losses at Halifax/Bank of Scotland, the company it conntroversially acquired in a government-backed takeover in January, for record writedowns which resulted in a loss of 3.1 billion pounds ($5.3 billion).
However, the markets had been pricing much worse, with some analysts warning that the bank could lose nearly 5 billion pounds.
As a result, investors cheered the results as well as the assertion from chief executive Erick Daniels that the second half of the year would be better.
Lloyds shares closed up 10.6 percent at 93.20 pence. Other banking stocks rose on the coattails of Lloyds, with Royal Bank of Scotland Group, majority owned by the government, up 4.4 percent ahead of its own earnings statement on Friday.
"The spike in the share price in early trade represents a collective sigh of relief that the impairment numbers have peaked according to the bank," said Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers.
Lloyds shares have roughly tripled since March amid mounting hopes that the banking crisis may be over after unprecedented support measures from governments and central banks. In Lloyds' case, the government holds a 43.4 percent stake after investors baulked at the burden of the HBOS acquisition, which was cleared by the government when it waived regulatory restraints.
The last time Lloyds shares traded over 100 pence was in January — but even that is way down on the 600 pence levels they were in the autumn of 2007.
As with other banks reporting this week, investors shrugged off higher impairment charges related to risky loans.
The bank reported that impairments rose from 2.5 billion pounds to 13.4 billion pounds — 80 percent of that came from what the bank described as riskier loans from HBOS. The majority of HBOS loans "are outside the traditional Lloyds low-risk appetite," the company said.
"The momentum of banking shares has been positive since March and we see little reason why this will reverse in the short term given the market's increased appetite for risk and the improvement in economic figures," said Jonathan Jackson of Killik & Co.
He cautioned, however, that he did not expect the recovery to be smooth and that growth in British output will be subdued in the medium term.
Investors appear to be hopeful that the British economy will recover, allowing the company's mainstay retailing business to prosper and reduce the potential losses from bad loans.
And though Lloyds chief executive Daniels is projecting only weak growth in the British economy next year, he anticipates that that impairments peaked in the first half of the year and that the group's results will "improve in the second half and through 2010."
Analysts said the figures were difficult to assess as they assumed that HBOS was part of the company from Jan 1 even though it was not fully absorbed until later in the month.
Hargreaves Lansdown's Hunter said the largely property-related HBOS writedown of over 13 billion pounds was more than expected, whilst the Tier 1 capital of 6.3 percent "looks light in comparison to its peers."
Tier 1 capital is an important measure of a bank's financial solidity.
Other banks which reported first-half earnings this week also reported higher impairment charges for bad loans, but Barclays and Standard Chartered managed to post higher profits anyway.
Lloyds said it is still talking to the government about terms for joining the Asset Protection Scheme, which would insure some risky assets but also likely raise the government's stake in the bank. Lloyds said about 40 percent of the assets which contributed to the first half impairment charge would probably be covered by the insurance.
Lloyds said it intended over the next five years to dispose of 200 billion pounds worth of non-core assets out of a total of 300 billion. It said assets "account for a disproportionate level of risk."
"It is anticipated that the group's loan to deposit ratio will return to legacy Lloyds TSB levels of approximately 140 percent over the next few years," the company said.
The bank's retail division, including mortgage specialist Halifax, provides one in four mortgages in the United Kingdom. Retail impairment losses increased by 60 percent to 2.2 billion, mainly reflecting the impact of lower house prices on mortgage impairment charge, Lloyds said.
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On the Net: http://www.lloydsbankinggroup.com
