Today was new Lloyds boss Antonio Horta-Osorio's first results since taking over in March and, by the looks of it, he was keen to clear the decks from the previous regime. Lloyds posted a whopping £3.5bn loss for the quarter, largely because it has chosen to set aside £3.2bn to cover the cost of compensating customers mis-sold payment protection insurance and £1.1bn to cover loan losses in Ireland – both of which numbers were much higher than expected. Of course you might argue that it's sensible for the bank to take a conservative view, particularly if it's gearing up for a return to the private sector. But there's also an additional benefit: when the bank reports better numbers later in the year – as it surely will – the new boss can take all the credit...
This approach is not exactly uncommon when a new CEO takes the helm; in a process often called 'kitchen-sinking', they'll get as much bad news out of the way as possible early on, while they still enjoy the goodwill of the markets (ie, when they can't get any of the blame for it).
And there does look to be a degree of this going on with that PPI provision. Although the British Bankers Association lost its latest legal battle with the FSA last month, most of the big banks are still considering whether or not to appeal. However, Lloyds has not only thrown in the towel, it has also set aside a much bigger compensation pot than the City expected. The BBA has previously suggested it would cost the entire industry about £4.5bn; even if you work on the basis that Lloyds is on the hook for about a third of this, that still doesn't get you anywhere near £3.2bn. (Indeed, this implies the sector's total bill will be more like £9bn – twice as much as previously thought.)
Lloyds also posted a £1.14bn impairment charge to cover projected losses on the £27bn of loans it has outstanding in Ireland. Again, that's nearly twice as much as the City expected – and it's largely because Horta-Osorio has pencilled in a further 10% fall in the Irish property market (not unreasonably, we'd argue). This pushed its total bad loan charges to £2.6bn, £200m up on the same period last year – while the market was also spooked by a fall in its margins. All of which unsurprisingly made Lloyds the biggest faller in the FTSE 100 this morning.
But we doubt Horta-Osorio will be too bothered (and not just because setting a low base line will presumably be good for his bonus). His argument is that this isn't about kitchen-sinking; it's about introducing a more transparent approach, and being honest about the bank's problems (the implication being this didn't happen under the last boss, which is hardly surprising since he was on his way out and had at least £1.4m reasons to make the picture look positive). That makes perfect sense, particularly as Lloyds looks to wean itself off Government support.
There were signs of progress today, too: the bank reduced its reliance on state funding by £26bn – while it also increased its lending to SMEs, despite the market shrinking. So Horta-Osorio may well be on the right track.