Banking: Lloyds Bank records GBP 2BN profit after COVID pandemic loss

• Lloyds Bank announces restart of dividend payments
• Lloyds Bank lifts full-year targets after record GBP 2BN profit in 2021
• Barclays and Starling Bank optimistic about post-pandemic prospects
• Santander and Metro Bank face ongoing challenges due to the lingering effects of the coronavirus pandemic

Lloyds Banking Group recorded a first-half profit of GBP 2BN on July 29th after suffering a GBP 600M loss in 2020.

The high street bank said gains had been boosted by the house buying frenzy and the improved recovery outlook for the UK economy, following the removal of COVID restrictions as part of UK Prime Minister Boris Johnson’s lockdown exit roadmap.

Lloyds Bank also announced that it would be relaunching dividend payments a day after Barclays bank unveiled more than USD 1BN in shareholder payouts.

Barclay’s bank published positive earnings on Wednesday, evidence that banks’ profits are recovering now that concerns over the coronavirus pandemic and bad loans are fading.

Lloyds Bank posted a pretax profit of GBP 3.9BN in the six months leading to June, beating analyst forecasts of GBP 3.1BN.

The bank had suffered steep losses in 2020 after setting billions aside to help cover any potential bad loans linked to the UK’s coronavirus crisis.

However, news that banks are returning to profit has significantly boosted banking stocks, with Lloyds shares rising by 1.5% in the wake of the publication.

Although Lloyds Banking Group has closed in the red, the firm’s share prices are now up by more than 30% in 2021 and could continue to rise as the UK’s domestic coronavirus situation improves.

Besides reinstating its dividend payments, the bellwether bank confirmed the acquisition of the digital savings and retirement group Embark, which has 410,000 customers and assets worth GBP 35BN.

Like Barclays, Lloyds is keen to accelerate its push into wealth management and negate squeezed margins from the Bank of England’s (BoE) record low interest rates.

Bank profits came under significant pressure in Britain after the UK government-imposed coronavirus lockdown restrictions as this caused a substantial shift in consumer behaviour.

Consumer savings have increased dramatically over the last 16 months, with new figures from the BoE showing that average households’ net flow into deposit accounts increased to GBP 9.8BN in June.

Separate data from Pantheon Macroeconomics estimates that household savings have risen to 8% of UK gross domestic product (GDP).

Lloyds is looking to capitalise on the pandemic-driven savings boom and an increase in lending, driven by UK Chancellor Rishi Sunak’s stamp duty tax break.

According to Lloyds Bank, borrowing rose by GBP 7.5BN in H1 2021; however, growth was outpaced by deposits as customers continued to boost their savings.

Freetrade Analyst Gemma Boothroyd said: “Lloyds is banking on headlines of its biggest acquisition since going private in 2017 to glaze over a 33% decline in net interest income.”

Lloyds lifts targets as UK recovery outlook improves

After upgrading its economic forecasts, Lloyds Bank released GBP 656M of its bad loan provisions after setting aside GBP 1.4BN to cover any potential defaults linked to COVID-19.

Executive Director and Chief Financial Officer of Lloyds Banking Group William Chalmers stated: “We set some funds aside to allow for any uncertainties pertaining to the coronavirus pandemic, the effects of Britain’s vaccination programme and mutant variants.”

As evidence has shown that coronavirus vaccines are severing the link between severe symptoms, hospitalisations and deaths, “we have upgraded our overall outlook for the UK economy,” added Mr Chalmers.

However, the bank highlighted remediation charges and costs for other recovery measures, including compensation for fraud and a previously disclosed fine for deceiving insurance clients.

Lloyds Bank said that plans to increase employee bonuses would increase outgoings by GBP 100M in 2021.

The retail banking company is also in the middle of a restructuring of its board room after former Chief Executive Officer (CEO) Antonio Horta-Osorio left the group to become chairman of Credit Suisse four months ago.

William Chalmers is currently a stand-in for HSBC banker Charlie Nunn, who will join newly appointed Chairman Robin Budenberg in the coming months and create a refreshed growth strategy for the British bank.

Lloyds expects a full-year return on tangible equity of approximately 10% in H2 2021, beating previous estimates for a rise of between 8.5-10%.

Rival, Co-op Bank, is also on course to hit its full-year targets and return to “sustainable growth” by year-end.

Co-op Bank posted an underlying profit of GBP 12.9M in H1 2021, up from a loss of GBP 33.9M during the first six months of 2020.

Starling Bank has also announced its first acquisition to boost its lending capabilities.

Starling Bank expands lending capabilities with its first acquisition

Starling Bank has acquired buy-to-let mortgage provider Fleet Mortgages in a GBP 50M cash and share deal as part of a broader plan to boost lending through a combination of strategic forward-flow arrangements and targeted mergers and acquisitions (M&A) activity.

The British digital lender is hoping to launch an Initial Public Offering (IPO) in the next two years – which refers to a systematic operation of offering the shares of a private firm to the public in a new stock issuance.

Fleet Mortgages, which is based in Hampshire, provides buy-to-let mortgages for landlords through adviser distribution channels. To date, it is the only mortgage lender that has experienced zero credit loss.

Once the acquisition is complete, Starling Bank will become the sole funder for future originations, which will allow the lender to access the challenger bank’s deposit base.

According to recent data, Starling has a deposit base of approximately GBP 6.7BN, which it aims to lend to bolster its expansion drive and grow its team.

Growth has already been partly driven by the UK government’s rescue loan schemes, which were made available to financial institutions after the first wave of COVID washed up on British shores.

Starling said that it expects the acquisition of Fleet Mortgages to generate an additional GBP 800M in mortgages for 2021, on top of the GBP 1.75BN worth of mortgages that the lender has already originated.

Although Starling has acquired fleet Mortgages, the lender’s day-to-day activities and management division are expected to remain the same. Starling also said that the acquisition of the Hampshire-based lender is the first in a series of takeovers for the company, which aims to change the banking landscape radically.

Several banks have kicked off the bank reporting season in good spirits, with Barclays PLC cheering data showing that first-half profits beat forecasts and that the firm is paying out more dividends than expected.

Barclays increases dividends as H1 profits beat expectations

Like rivals, Barclays only resumed uncapped dividend payments two weeks ago after the BoE removed its restrictions in tandem with the final unlocking of the UK economy.

Experts had predicted Barclays to pay out GBP 1.8p in dividend payment, so the GBP 2p was a welcome surprise for investors and boosted the bank’s share price.

Although the bank is expected to suffer a GBP 340M loss, as a result, it remains confident in its financial position ahead of plans to launch a GBP 500M share buyback scheme, which comes on top of a GBP 700M programme announced in April.

However, not all banks and lending institutions are experiencing the same fortune as Lloyds and Barclays due to the lingering effects of the coronavirus pandemic.

Spanish multinational financial services Santander confirmed that it has had to temporarily close 25 branches across the UK due to staff shortages created by the so-called “pingdemic.”

According to outgoing CEO Nathan Bostock, approximately 5% of its UK network of branches had temporarily closed due to the number of employees receiving notifications from the NHS Test and Trace app advising them to self-isolate.

Mr Bostock said that Santander was moving staff that could work to nearby branches but noted that it has not always been feasible. Meanwhile, a spokesperson for Santander said that some units had been closed for over a week due to the reduced workforce.

Santander has been unable to provide a list of closures as the branches affected by the “pingdemic” were changing day by day.

Rival lender Metro Bank has also admitted that its operations have been hindered by staff shortages, resulting in reduced customer activity in July.