05.03.10

By Deirdre Hipwell

Banking group saddled with £24bn of bad loans but says worst is over

Lloyds Banking Group reported £24bn of bad loan impairments last year and a pretax loss of £6.3bn, as it continues to struggle to overcome its massive exposure to commercial property.

The group, which was formed from Lloyds TSB’s shotgun wedding with Halifax Bank of Scotland (HBOS) last year, said in its full-year results for 2009 on Friday that total impairments had risen significantly to £23.9bn, compared with £14.9bn in 2008. It attributed the large increase “principally to the HBOS portfolios and their high level of exposure to commercial property” (see boxes, opposite).

More positively, impairments in the second half of 2009 were 21% lower than in the first half, Lloyds said, adding: “We expect to see a similar pace of half-yearly improvement [in impairment provisions] throughout 2010, and substantial further reductions in 2011 and beyond.”

Lloyds’ full-year £6.3bn loss decreased slightly from a £6.7bn loss in 2008. Total income rose 12% to £23.9bn, thanks to the absence of £3.4bn of mark-to-market losses on the bank’s treasury asset portfolio and gains of £1.5bn on capital transactions. Meanwhile, costs fell 5%.

The bank said: “The higher income and lower costs drove a substantial uplift in the trading surplus, which increased by 35%, and our cost-to-income ratio improved to 48.4%.”

Its core business performance was also stronger on the back of £35bn of gross new mortgage lending and around 100,000 new commercial accounts, “despite year-on-year margin pressure and a weak economy”.

Chief executive Eric Daniels said the group, which spent £534m in “synergy costs” to integrate the two banking businesses, had a “robust capital position and strengthened funding profile”, following its success in raising capital in December.

Lloyds’ outlook on the bank’s future performance and the country’s economy is cautiously optimistic. It says the economy is showing signs of stabilisation, and that weak upturn is expected in 2010, in addition to a “significant improvement in the performance of our continuing businesses in 2010”.

It is even more positive about the medium term.

It hopes to take advantage of a “significant opportunity to leverage its relationship-led model across an enlarged business base with high single-digit income growth from continuing businesses targeted within two years”.

Lloyds also proposes a further “run-off” of around £140bn of assets to reduce and “rightsize” its balance sheet in the medium term and allow for investment in core relationship businesses.

The bank defended its performance as resilient in the circumstances. It said: “The deterioration in the UK economic environment, particularly in the first half of 2009, created an extremely challenging operating background against which to integrate two large banking organisations.

“The group has a strong risk management culture and is well placed to manage through the near-term challenges and benefit from what we expect to be a slow but steady UK economic recovery during 2010 and beyond.”

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Source: Property Week (www.propertyweek.co.uk)