By Kristy Dorsey

Bank of Scotland owner Lloyds plunged into a pre-tax loss of £602 million for the first half of the year as it set aside another £2.4 billion to cover potential bad loans, admitting that the UK’s lockdown had a “much larger” economic impact than anticipated back in April.

Total provisions against bad debts by Britain’s biggest retail bank now stand at £3.8bn as it prepares for a wave of defaults in the coming months by both personal and business customers. For the full year, Lloyds expects charges for Covid-related losses to come in at between £4.5bn and £5.5bn.

Chief executive Antonio Horta-Osorio, who is due to stand down next year, said supporting customers through the crisis is an “investment in the business” as the bank’s activities are heavily focused within the UK.

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Since the start of the crisis, Lloyds said it has provided more than 1.1 million payment holidays to retail customers in respect of mortgages, loans, credit cards and motor finance. It has also approved more than £9bn of business loans through various Government programmes such as Bounce Back Loans and the Coronavirus Business Interruption Loan Scheme.

“We are aware, of course, that the support we are providing to our personal and business customers to help them through the current crisis will have a cost to the group,” Mr Horta-Osorio said. “We believe this is the right thing to do, as supporting our customers directly aids the recovery of the economy from which we benefit.”

The group made a pre-tax loss of £602m during the six months to the end of June, compared to a profit of £2.9bn in the same period a year earlier. Income for the half-year fell by 16% to £7.4bn.

The hefty provision for potential bad debts was 60 per cent higher than average analyst estimates, and was prompted by sharp revisions to the group’s projected scenarios as to how the economic crisis might unfold. Under new accounting rules, banks are required to disclose their best-to-worst case scenarios, with a weighting for each as to how likely it will come to fruition.

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Lloyds’ worst-case projection, to which it has assigned a 10% probability, is for a 17.2% decline in UK GDP as unemployment peaks at 12.5% in the second quarter of 2021. That compares to the 7.8% decline in growth it modelled as the worst outcome when it gave its first quarter trading update in April.

Its current central forecast is for a 10% fall in economic growth during 2020, with unemployment peaking at 9%. The group has given this scenario a 30% weighting.

Shares in Lloyds fell as much as 9% to their lowest level in more than eight years during early trading yesterday, and made only a partial recovery to close 7.6% lower at 26p. During the past six months, the stock has halved in value as UK lenders have been marked lower amid the Covid-19 pandemic.

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“These are hardly ideal conditions for Lloyds, in fact they’re pretty close to the perfect storm,” Hargreaves Lansdown analyst Nicholas Hyett said. “While we don’t think the bank will be rushing to restart dividend payments, even when they do begin they may not be at the level investors had previously expected.”

Asked about his plans for the future, Mr Horta-Osorio said he had no thoughts at this time about what he might do after leaving Lloyds, and remains focused on seeing through the group’s broader strategic objectives amid the pandemic. It was announced earlier this month that he will be leaving after more than a decade as chief executive, with a target departure date of June 30 next year.

About 50,000 of Lloyds’ 65,000 employees are currently working from home, and though the bank would like to bring them back as soon as possible, Mr Horta-Osorio said there would likely be a greater degree of flexible working going forward. Of those staff working from home, two-thirds have said they would like to continue doing so to at least some extent.