Lloyds TSB 9-month Pre-Tax Profit Drops; Announces Addl. Capital Raising from Shareholders, Govt. - Update

(RTTNews) - Financial services provider Lloyds TSB Group Plc (LYG, LLOY.L, LLDTF.PK) Monday reported a sharp drop in its nine-month statutory pre-tax profit, but said it remains on track to deliver a good trading performance in 2008. The bank also confirmed that it is going forward with the proposed acquisition of troubled mortgage lender HBOS Plc (HBOS.L, HBOOF.PK) and that it plans to raise additional capital in the form of a Placing and Open Offer and new preference shares.

HBOS, which released its interim management statement on the same day Monday, said "the Group is operating in difficult market conditions." In the nine-month period, the Group has seen its profitability impacted by higher impairments, negative fair value adjustments to the Treasury Portfolio, the sale of BankWest, and short term fluctuations in investment returns.

In its interim management statement London-based Lloyds noted that its first nine months statutory pre-tax profit declined significantly from the year-ago period, hurt mainly by the market dislocation, insurance related volatility, and higher impairments especially in the area of loans given out to corporations. Excluding the impact of all these negative market conditions, each segment grew revenues in excess of cost growth.

Overall, the Group continued to capture market share in a number of key areas, while improving new business product margins. The company said it continues to trade well and deliver good income growth from its relationship businesses "in an immensely challenging period for financial services companies."

The British bank, founded in 1765, further stated that during the third quarter its core businesses continued to trade strongly and remained manageable. Lloyds noted, "Whilst no bank has been immune to the recent market turbulence and economic downturn, the impact on the Group's core trading continues to be manageable."

Segment-wise, Lloyds's UK Retail Bank has continued to make strong progress, with slightly higher revenues in the third quarter compared to the first half, as products sales improved. The segment also recorded new current accounts at a level similar to the prior year, as well as good growth in bank savings and Wealth Management cash balances.

However, the levels of mortgage allocations have slowed substantially over the last few months, as a result of the difficult market conditions and falling house prices throughout UK. Lloyds' estimated market share in new lending for the quarter was 31%. The Group noted that it managed to reach this level, by maintaining its asset quality at high levels through its continued focus on prime UK mortgage market. Its average loan-to-value of new business written during the quarter of 2008 was 64%.

In Insurance and Investments, sales in the bancassurance channel grew at good levels from strong sales of its stand-alone protection products and OEICs in its Wealth Management business. Sales at the IFA channel benefited from good sales of pensions, but a considerable reduction in sale of savings and investment products led to an overall reduction in new business sales. The Scottish Widows channel continued to improve in operational efficiencies, with a strong capital position. The General Insurance channel recorded improved home insurance sales through the branch network, and strong sales through its increasing corporate partnering arrangements, and now expects to deliver good profit growth in 2008.

Lloyds' Wholesale and International Banking segment, which relatively has limited exposure to assets, impacted by current market uncertainties, registered lower profit at GBP 270 million in the quarter due to the continued effect of market dislocation on certain legacy portfolios. Excluding this impact, the division achieved double-digit growth in its profit before tax. Despite the market conditions, this division has continued to make significant progress in its core banking businesses. As of September 30, the Goup's portfolio of available-for-sale assets totaled GBP 24.7 billion.

This segment benefited from a recent amendment in international accounting standards. Had it been not for this reclassification, its market-dislocation related charges would have been higher by GBP 114 million. Moving forward, the division also expects to write-off about GBP 300 million in the second half, following higher impairment charges in its corporate lending portfolios and the collapse of a numerous high profile financial services companies.

Overall, the Group noted that is has maintained its strong liquidity and funding position, with its wholesale funding maturity profile at a level similar to last year. Also, over the last couple of weeks, it has seen some improved signs of stabilization in the global money markets, lower LIBOR interest rates, and an easing of general liquidity and funding pressures. This has resulted in higher confidence levels, especially in some capital markets, allowing the Group to secure some long-term funding, including a £400 million 10 year bond, without resorting to the Government guarantees.

Looking ahead, Lloyds noted that it remains on track to deliver a good trading performance in 2008, notwithstanding the continued deterioration in the UK economic environment. Group Chief Executive Eric Daniels said. "Whilst continuing to remain cautious on the UK economic outlook, the Group is well positioned to withstand the expected economic challenges over the next few years."

Separately, Lloyds said it planned to send out a circular to its shareholders regarding the recommended acquisition of HBOS, the sixth largest bank in the U.K, and its proposed capital raising in the form of a Placing and Open Offer and New Preference Share Issue.

Under the Placing and Open Offer, about 2.6 billion ordinary shares at 173.3 pence a share will be offered for sale to Lloyds shareholders. The British government, through HM Treasury, has agreed to acquire all remaining shares not taken up by it shareholders. The Placing and Open Offer is expected to raise GBP 4.5 billion in additional capital for the acquisition.

Besides the Placing and Open Offer, HM Treasury has also agreed to subscribe for around GBP 1 billion of Lloyds' new preference shares.

In addition to the proposed acquisition, the Placing and Open Offer and the New Preference Share Issue require the approval of the general meeting, which will be held on November 19, and is also conditional on the HBOS's Placing and Open offer proceedings. The Lloyds' Board also unanimously recommends that shareholders vote in favor of the resolutions, as each of its members intend to do in relation to their own holdings.

On September 18, Lloyds agreed to buy HBOS for GBP 12.2 billion pounds, or U$22 billion, to create a financial giant that will hold nearly 28% of Britain's mortgage market. Lloyds agreed to pay 232 pence a share for each HBOS share, in an all-stock transaction.

HBOS, which released its interim management statement on the same day Monday, said "the Group is operating in difficult market conditions." In the nine-month period, the Group has seen its profitability impacted by higher impairments, negative fair value adjustments to the Treasury Portfolio, the sale of BankWest, and short term fluctuations in investment returns. However, to some extent this has been contained on account of higher net interest income from its banking businesses, as well as strong growth in its Insurance & Investment business.

HBOS, formed in 2001 through the merger of mortgage lender Halifax Plc and Bank of Scotland, noted that its capital ratios benefit from the proceeds of the Rights Issue and capitalization of the interim dividend for 2008. At September end, its Tier 1 ratio was 8.1% and Core Tier 1 ratio was 6%. Following the completion of the proposed placing of GBP 8.5 billion in additional equity and GBP 3 billion in 12% preference shares in January 2009, the company expects to raise it capital ratios by about 340 bps for Tier 1 and 250 bps for Core Tier 1.

HBOS also reported that its proposed acquisition by Lloyds is proceeding according to plan and expects to hold a General Meeting in December to approve the acquisition, as well as the placing of equity and preference shares. Subject to shareholder approval and legal and regulatory clearances, HBOS expects the deal to close in January 2009.

Going forward, HBOS sees its capital position to become "robust' following the capital injection by the U.K. government and a further advancement of opportunities once it joins the enlarged Lloyds Group in January 2009. Meanwhile, an article that appeared in gantdaily.com on November 1 noted that the U.K. Government is looking for a rival bidder for HBOS, just a day after business minister Peter Mandelson approved Lloyds' takeover.

LYG closed Friday's regular trading on NYSE at $12.64, down $0.02, or 0.16%, with a volume of 824,381 shares.

On the LSE, LLOY.L is currently trading at 191.80, down 6.00 pence, or 3.03%, on a volume of 6.74 million shares.

HBOS.L is currently trading on LSE at 102.10 , up 2.80 pence, or 2.82%, on a volume of 6.74 million shares.

LLDTF.PK last traded on October 30, to close at $3.18.

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