Lloyds takes hit from TSB sale

Lloyds Banking Group took a £660m hit from the sale of TSB in the first quarter, masking improving underlying profits that investors welcomed by pushing shares up more than 3 per cent.

The government-backed bank reported a statutory profit before tax of £1.2bn in the first quarter on Friday, down from £1.4bn in the same period a year ago.

However, stripping out one-off items such as the costs from the sale of TSB to Spanish lender Banco Sabadell, underlying profit increased by 21 per cent to £2.2bn, beating analyst expectations of £2bn, driven by an improvement in income and a fall in impairment charges.

The company's share price rose 3.4 per cent in early trading to 80.00p.

The bank boosted net lending to small businesses by 4 per cent year on year, while income increased by 3 per cent to £4.6bn, up from £4.5bn in 2014. The lender reduced its impairment charge by 59 per cent to £177m.

Antonio Horta-Osorio, chief executive of the bank, said: "While we are not complacent, it has been a strong start to 2015."

TSB, the challenger bank that was carved out of Lloyds, agreed a takeover approach from Banco Sabadell in March in a deal that values the UK lender at £1.7bn.

But the takeover triggers a £660m pre-tax charge in the first quarter for Lloyds, as the bank is set to sell its entire 50 per cent stake in TSB to Sabadell.

Lloyds was forced to spin off TSB in 2013 as a condition of receiving state-aid in 2008 under the rules of the European Commission.

However, as part of the deal, Lloyds has to pay a £450m dowry to cover the expense of migrating TSB off its IT systems, which until now has been costing the challenger £100m a year.

The £660m charge includes provision for the dowry and loss of future revenue paid to Lloyds for the use of its IT platform.

George Culmer, chief financial officer at the bank, said: "This is the last quarter where you will see TSB anywhere in our earnings."

Although Lloyds has been the worst hit by the mis-selling of payment protection insurance as it had the largest share of consumer lending, the bank has not made a further provision in the first quarter to cover the issue.

The lender has made a total provision of £12bn to date, of which more than £2.5bn remains unutilised for redress.

Lloyds has also boosted its capital buffer from 12.8 per cent at the end of last year to 13.4 per cent.

Strong capital generation bodes well for dividend growth, as payouts are resumed this year for the first time since the financial crisis. The bank guided at full-year results that it will target a dividend payout ratio of 50 per-cent over the "medium-term".

The resumption of dividend payments paves the way for the government to offload more of its stake in the lender, which currently stands at 20.95 per cent. A programme to drip-feed shares into the market, unveiled at the end of last year, is expected to reduce the government's stake to 20 per cent by the end of June.

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