Lloyds TSB said its underlying profits are on track to grow 11 percent this year but the British bank will take a 200 million pound ($405 million) hit from exposure to credit market problems.
Lloyds, Britain's fifth biggest bank, said on Monday it was "firmly on track" to deliver a good performance for the year and produce good economic growth, and remained confident in its earnings growth prospects over the next few years.
The bank said 2007 profits would be in line with analysts' expectations. It should report a pretax profit of 4.13 billion pounds this year, based on the average of a Reuters Estimates poll of 18 analysts, up from 3.71 billion in 2006.
Lloyds shares were down 1 percent at 483 pence, alongside weakness across European bank stocks after Swiss bank UBS unveiled a shock $10 billion writedownand obtained an emergency injection of capital.
The Lloyds writedown, general insurance claims and charges for bank fee refunds were all slightly higher than expected and next year's profits face dilution from asset disposals, but the overall message was satisfactory, said James Hutson, analyst at Keefe, Bruyette & Woods.
"2007 underlying numbers seem to be unrocked and they are guiding in line with consensus which is encouraging, although for 2008 the impact of the disposals could see a paring back of numbers," Hutson said.
Corporate Markets Hit
Lloyds said its UK retail banking and insurance and investments units had continued the strong growth trends seen in the first half of this year, but wholesale banking had been affected by a credit market crunch in recent months.
It wrote down the value of its asset-backed securities (ABS) collateralized debt obligations (CDOs) by 89 million pounds, leaving a residual investment of 130 million. It also wrote down 22 million pounds on the value of structured investment vehicle (SIV) capital notes, leaving an exposure of 78 million.
Corporate markets' profit will also take a 90 million pound hit from a cut in the value of its trading portfolio. At the end of October the trading portfolio contained 181 million pounds of indirect exposure to U.S. sub-prime mortgages and ABS CDOs.
The writedowns would be more than offset by a "significant profit" on the sales of non-core businesses -- notably Lloyds TSB Registrars and Abbey Life Assurance -- which the bank said had also strengthened its capital ratios.
But the sales would dilute profits after tax in the fourth quarter by about 20 million pounds, it said.
Lloyds said it expects to repatriate at least 1.8 billion pounds from its insurance arm Scottish Widows this year, to lift the total over 3.6 billion pounds in the last three years.
Group sales growth had been good and efficiency continued to improve, leaving revenue growth "well ahead" of cost growth and improving its cost/income ratio, the bank said.
An efficiency improvement program should deliver net benefits of 140 million pounds this year, above the 125 million targeted. But additional insurance claims for floods are likely to total 100 million pounds this year and the full-year impact of refunds for bank customers will be around double the first-half total of 36 million pounds, it said.
Lloyds shares have dropped 15 percent this year, making it the third best performer in the battered UK bank sector, which is down 18 percent in 2007. The drop has cut Lloyds' market value to just under 28 billion pounds.