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UK lender TSB pushed to H1 loss, but loss of customers from IT outage negligible

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UK lender TSB pushed to H1 loss, but loss of customers from IT outage negligible

TSB Banking Group PLC's disastrous attempt to switch its customers' accounts onto a new IT system provided by Spanish parent Banco de Sabadell SA resulted in £176.4 million of first-half costs, pushing the bank to its first pretax loss.

TSB on July 27 booked a first-half loss of £107.4 million, compared with a profit of £108.3 million in the year-ago period. At the group level, Sabadell, which bought TSB in 2015, saw net interest income fall 7.8% in the second quarter compared with the first to €898.6 million. It booked an extraordinary charge of €203 million for the TSB outage, including €92.4 million for future customer claims, which pushed it into a €138.7 million loss in the second quarter.

Sabadell booked first-half group attributable net profit of €120.6 million, down from €450.6 million a year earlier. Excluding TSB, first-half profit dropped to €317.7 million from €385.3 million. Shares in the bank were down nearly 3.5% as of shortly before 4 p.m. Madrid time July 27, on a day when Spain's other major lenders all rose.

The botched IT transfer, carried out in April from a system rented from Lloyds Banking Group PLC to one supplied by Sabadell, saw thousands of customers locked out of their accounts. It led to a surge in fraud attacks, resulted in claims that some customers were given access to others' accounts, and saw TSB CEO Paul Pester vilified by a U.K. parliamentary committee and urged to quit. In total the bank received 135,403 complaints following the transfer, it said July 27, of which only 37% have been resolved.

TSB said it recorded customer redress and fraud costs of £115.8 million, while the cost of hiring specialists, including accountants Deloitte, law firm Slaughter & May and computer firm IBM, in the aftermath of the crisis, cost £30.7 million. Waived fees and charges as a result of the disruption added up to £29.9 million.

However, despite TSB's chaotic attempt at customer migration, only 26,000 customers out of more than 5 million switched their bank account away from TSB, while 20,000 new customers opened an account or switched their accounts to TSB in the second quarter. The net loss of current accounts in the second quarter of 6,000 was only slightly up on the first quarter, before the IT problems arose, when just over 5,000 customers left.

Indeed, total current accounts actually grew by 0.6% in the second quarter compared with the previous quarter. The bank also advanced £2.6 billion of new mortgage loans in the first half, while total customer lending of £31 billion was up 2.8% on the year.

"We're making progress resolving the service problems our customers experienced following our IT migration, and we will continue to work tirelessly until we have put things right. I know how frustrated many customers have been by what's happened. It was not acceptable," said Pester.

Sabadell CEO Jaime Guardiola was supportive of Pester and emphasized that TSB has one of the strongest capital positions among U.K. banks, with a common equity Tier 1 ratio of 19.2%.

"We expect to retain most of our customers and regain the confidence they have in the service TSB can provide. The IT platform is improving very quickly and we will be able to reduce the damage very much," Guardiola said.

Sabadell CFO Tomas Varela said costs related to the TSB IT failure are not expected to extend into 2019, while additional costs at TSB for the rest of 2018 are likely to be related to paying for extra resources to cope with the crisis, including recruiting more than 1,800 new staff and redeploying 700 existing employees, rather than the cost of claims from customers, fraud, lost profits or waived fees.

The IT disaster strained relations between TSB and Sabadell at group level and led to a questioning of the Spanish group's commitment to the U.K. business, but Guardiola reiterated on the call that Sabadell was committed to TSB. He said the bank expected to be able to participate in the bidding for funds set aside by Royal Bank of Scotland Group PLC to boost competition in the small-business lending market.

"We remain committed to our mission to make the bank better for small businesses. We have the largest exposure to that in Spain and now we have the perfect platform to serve small businesses in the U.K., so we will continue with our obligation to apply for RBS funds," Guardiola said.