Antonio Horta-Osorio is stuck playing Sisyphus. In Greek mythology, the Corinthian king had to push a boulder up a hill, only to see it roll down again just before the summit. Likewise the chief executive officer of Lloyds Banking Group got a long way in the third quarter, burnishing the U.K. bank's core operations and shrinking its toxic non-core assets. But continuing pain from the past misselling of payment-protection insurance (PPI) yet again dragged Lloyds back into a loss.
The progress made by Mr. Horta-Osorio in his main job is tangible. Underlying profit in the core business rose by 25 per cent quarter on quarter. Non-core assets should be down to around £100-billion ($161-billion) by the end of the year, around half where they were two years ago. The bank's latest £6-billion forecast for group impairments in 2012 is over £1-billion below previous guidance. Investors think it won't end there: the shares rose 7 per cent, adding £1.8-billion to Lloyds' market value, but still trading at just under 75 per cent of tangible book value.
But PPI won't go away. A fresh £1-billion provision for compensation claims brings Lloyds' overall hit from the scandal to £5.3-billion. Lloyds still can't say what the final total could be. Although recent claims trends are down, the overall stock of PPI products sold by the industry since 2001 is £34-billion, according to JPMorgan. Not all of these will have been missold, but given Lloyds may represent 40 per cent of the market, its overall bill probably hasn't peaked.
If so, Lloyds will find it tougher to lift its capital position under new Basel III rules from 7.7 per cent at the moment to 10 per cent by 2014. The bank's non-core division and PPI will already generate £6-billion of losses in 2012-13, according to JPMorgan. Extra PPI provisions would erode the £9-billion of capital generation forecast for the core bank. Lloyds would then rely on further deleveraging to rebuild its equity base.
Investors have been without a dividend since 2008. The rally suggests investors reckon PPI losses won't get appreciably worse. If that assumption is wrong, their long wait will drag on.