Lloyds Comes Out With Third-Quarter Loss On The Back of PPI Provisions

on Nov 1, 2012

Lloyds (LON:LLOY), the biggest retail bank in Britain, swung into loss in the third-quarter after being hit by another £1 billion in compensations for the wrongly sold payment protection insurance policies.

**Q3 Results**
The released consolidated income statement shows the banking group achieved a net loss for the three months to 30 September of £316 million, nearly 28 percent lower than the £501 million achieved for the same period last year.
Bad debts in 2012 are expected to fall to about £6 billion, some £1.2 billion less than the start of the year. Bad debt losses fell 35 percent from a year ago to £1.26 billion.

Net interest margin remained in line with expectations at 1.93 percent compared to 2.1 percent in the first nine months of2011. Lloyds also managed to reduce costs by 5 percent and impairment by 40 percent.
Despite the third-quarter loss, shares in the company have surged by 3.23 percent to £0.419 in the morning trading session on the London Stock Exchange.

**The PPI Scandal**
In its financial statement the company boasted with the lowest FSA reportable banking complaints of all major UK banks at 1.4 per 1,000 accounts but this excludes the payment protection insurance (PPI) mis-selling scandal.
!m[Additional Billion Pounds in Compensation for Mis-Sold PPI Policies Weighs Heavy on The Bank’s Balance Sheet](/uploads/story/697/thumbs/pic1_inline.png)The PPI affair went public after a Sunday Telegraph investigation discovered a number of banks were guilty of mis-selling highly complex interest rate derivatives to hundreds of small and medium size enterprises (SMEs), despite them having limited knowledge of what they were purchasing.

The PPI were traditional variable rate business loans, which came packaged with complex bets on the fluctuating rates of interest and were then sold on by the banks’ investment wing for massive profits. The buyers wanted to protect their businesses from spiking rates but thought they are being sold policies that were the commercial equivalent of a fixed-rate mortgage. The businesses then took a massive battering from the significant costs attached to the PPIs when interest rates plummeted after the 2008 financial crisis.

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The cost of compensating customers has now reached £5.3 billion for Lloyds, while major high street banks combined have incurred costs of more than £10 billion.
“A number of uncertainties remain as to the eventual cost to the group of PPI complaints. However, we will continue to review closely our estimates based on our further experience of complaints volumes and seasonality, uphold rates and redress costs and by the time of our full year 2012 results announcement on 1 March 2013, we expect to have a higher degree of confidence in forecast trends and the ultimate likely cost of PPI,” Lloyds said in a statement.
The bank also said it wrote to the Financial Ombudsman Service (FOS) in September to address the issue of growing charges associated with the processing of claims and suggest that the management companies that bring in these claims pay these charges. According to Lloyds at least 50 percent of the claims it received were “duplicates or dubious” while FOS chief executive Natalie Ceeney told MPs this week an increasing number of claims are being thrown out by banks. Lloyds today insisted this was not the case and asked Ms Ceeney for concrete data.

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