Bloomberg News

Lloyds Sees Reduction in Net Interest Margin in Second Half

October 25, 2011

(Updates with analyst comment in fourth paragraph.)

Oct. 25 (Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, said it expects its net interest margin to narrow in the second half as it changes the way it allocates funding costs and capital.

The measure, the difference between what the bank earns on loans and its funding cost, may shrink to 2.05 percent for the full year, compared with 2.12 percent in the first six months, the London-based lender said in a statement today. The bank’s combined and statutory results won’t be affected by the change.

Lloyds’s funding costs are rising as Chief Executive Officer Antonio Horta-Osorio tries to wean the bank off low interest government loans and onto costlier wholesale funding. In August, the lender said it would achieve a net interest margin of “just above” 2 percent this year.

“Lloyds is essentially reaffirming margin guidance given in August, which is a bit surprising as we were expecting a modest deterioration to guidance versus August given that short- term funding costs have risen,” said Ian Gordon, an analyst at Evolution Securities Ltd. in London “The changing of the methodology doesn’t really matter. It shouldn’t change much.”

Lloyds fell 0.3 percent to 34.51 pence as of 10:35 a.m. in London trading. The stock has declined 48 percent this year.

“The new methodology is designed to ensure that funding costs are allocated to the divisions and that the allocation is more directly related to the size and behavioral duration of asset portfolios,” the bank said in the statement.

Lloyds is slated to report third-quarter results on Nov. 8.

--Editors: Edward Evans, Steve Bailey.

To contact the reporter on this story: Gavin Finch in London at

To contact the editor responsible for this story: Edward Evans at LLOY LN <Equity>

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