The bailed-out bank plunges to a loss after setting aside £3.2 billion in PPI compensation.
Yesterday, Royal Bank of Scotland (LSE: RBS), the bank 83%-owned by taxpayers, reported a £2 billion loss for 2011.
This morning, it was the turn of another bailed-out bank to unveil its yearly figures: Lloyds Banking Group (LSE: LLOY), of which taxpayers own 41%.
PPI send Lloyds plunging to a loss
Despite a weak UK economy and extreme volatility in financial markets, Lloyds claims that it had a "resilient underlying trading performance in 2011, in line with expectations".
In 2010, Lloyds made a before-tax profit of £281 million, but last year ran up a loss of more than £3.5 billion. This was largely due to a one-off charge of £3.2 billion to meet the cost of previously mis-sold payment protection insurance (PPI) policies.
The bank's income fell by 10% to just over £21 billion, hit by subdued lending demand, a smaller balance sheet following disposals, and lower margins. However, the impairment charge for written-off and doubtful loans fell by more than a quarter (26%) to £9.8 billion, with improvements seen across all lending divisions.
Thanks to higher funding costs, Lloyds saw its net interest margin (NIM, a key performance indicator for banks) slip by 14 basis points, from 2.21% to 2.07%. In short, the bank is making a lower return for every pound that it lends today than it has done in the past.
On the plus side, Lloyds manage to cut its internal costs by 4% to £10.6 billion, driven by an ongoing cost-reduction initiative, plus a smaller bonus pool, down 30% to £375 million.
A stronger, leaner Lloyds
In 2008/09, Lloyds received taxpayer bailouts totalling £17.4 billion -- something that must never happen again.
Hence, the bank is shrinking, strengthening and simplifying its balance sheet, as well as reshaping its business portfolio. As a result, the bank's total assets have shrunk by 3% from £1 trillion in December 2010 to £971 billion at the end of 2011. This was largely driven by a £53 billion reduction in non-core assets to £141 billion, plus Lloyds exiting seven overseas countries.
What's more, Lloyds has improved its funding position, increasing customer deposits by 6% to £406 billion, while reducing its reliance on wholesale funding from money markets by 16% to £251 billion.
Thanks to this ongoing de-risking process, Lloyds has reduced its loan-to-deposit ratio -- another measure of riskiness -- to 135%, versus 154% in 2010. In addition, the bank's capital strength is improving, with its Core Tier One capital ratio rising by 60 basis points to 10.8%.
A bank worth buying?
Clearly, Lloyds today is a very difficult animal from the catastrophic corporation that nearly collapsed following its shotgun marriage with ailing lender HBOS in 2008. It has become a simpler, more UK-focused bank, with less reliance on high-risk and overseas operations. For example, commercial loan growth was 3% at Lloyds, against a UK market down 6% in 2011.
Looking ahead, chief executive António Horta-Osório -- who recently returned to work after two months' sick leave due to stress -- wants Lloyds to be "the best bank for our customers".
However, in line with other bailed-out banks, the Lloyds brand has an image problem, not least because of its PPI mis-selling record. Furthermore, we taxpayers paid 63.2p per share for our Lloyds shares, collectively losing nearly £7.5 billion on our shareholding.
As I write, Lloyds shares are down 1.2% at 36.1p, valuing the bank at £25 billion. At this price, Lloyds trades on a forward price-to-earnings ratio of 13 and offers a prospective dividend yield of 0.7%, rising to 3% in 2013. Indeed, the bank remarked: "We understand that the absence of dividends has created difficulties for many of our shareholders and we remain committed to recommencing progressive dividend payments as soon as we are able."
Given that Lloyds expects its income to be lower this year than it was in 2011, and will also miss key medium-term targets in 2012, these fundamentals are fairly full. Therefore, I see no reason to rush to buy Lloyds shares today, as lower risks will translate into lower returns for shareholders in future.
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