Lloyds delays earnings targets, expects a tough 2012 - UPDATE

24th Feb 2012 07:04

Lloyds Banking Group said it expects the external environment to remain challenging this year and has had to delay its return on equity and income-related targets beyond 2014. Meanwhile, the lender reported a steep loss for 2011, dragged down by substantial charges in relation to Payment Protect Insurance (PPI).Shares were trading down 0.75% at 36.3p by 10:06 this morning.The statutory pre-tax loss came in at £3,542m, compared with a profit of £281m last year, and includes a £3.2bn non-recurring provision for PPI contact and redress costs. However, pre-tax profit for the combined businesses - which Lloyds believes reflects more "meaningful and relevant comparatives" - jumped 21% to £2,685m, while pre-tax profit for the core combined businesses rose 3% to £6,349m.The 'combined businesses basis' excludes of the amortisation of purchased intangible assets, PPI provision, losses on disposals in 2010 and volatility arising in insurance businesses, amongst other things.Meanwhile, combined businesses income fell 10% to £21,123m, due to subdued lending demand, continued customer deleveraging in the core, a smaller non-core portfolio, and a lower margin, the group said. This is expected to fall further in 2012 given the economic outlook, non-core asset reductions, subdued demand in the core loan book, high wholesale funding costs and the extended period of low interest rates. The bank managed to strengthen its capital position in 2011, with its core-tier one capital ratio improving by 60 basis points to 10.8%.Total bonus awards were cut by 30% to £375m, accounting for less than 2% of revenues, equating to an average payout per employee of £3,900. Nevertheless, the group assured that over half of those eligible for bonuses will get less than £2,000."In 2011, we established our longer term strategy for the Group, acted quickly and decisively to mitigate the effects of a challenging environment and put in place the right foundations to deliver on our objectives over the next three - five years, whilst continuing to support the UK economy," said Chief Executive António Horta-Osório.However, while the group said that it is confident of making its medium-term financial targets - set out in the June 2011 'Strategic Review' - "over time", the company now expects, "as anticipated in our Q3 2011 interim management statement", the attainment of both income-related (including operating income) and return on equity (15%) targets beyond 2014 as a result of a "weaker than expected economic outlook".Nevertheless, the group assured that its balance sheet, cost and impairment targets will be delivered by 2014 or sooner.It said that the balance sheet strengthening will come as a result of: non-core asset reduction of approximately £25bn; further deposit growth at least in line with the market; and strengthening the funding position and the core-tier one ratio.Nomura said of the results this morning: "given the complexities at Lloyds, our initial post-results reaction is subject to even more uncertainties than usual. Nevertheless, the main features seem similar to those at RBS" - strengthening the balance sheet "at the expense of profitability."BC