Lloyds bank celebrates a return to profit
Updated on 04 August 2010
Taxpayer-backed Lloyds Banking Group hails a "significant milestone" as it returns to a profit of £1.6bn in the first half of the year, as economics editor Faisal Islam explains why conveying hard-won confidence is essential for Lloyds.
Analysts said news of the marked turnaround was better than expected after the £4bn loss suffered in the same period last year.
Lloyds, which is 41 per cent owned by the taxpayer, said losses on bad wholesale loans more than halved in the first six months of 2010 - from £13.4bn last year to £6.5bn. The bank said charges from bad retail or customer loans meanwhile had scaled back by almost 40 per cent to £1.35bn.
Lloyds said it expects the trend to push into 2011 as house prices continue to stabilise.
However, Jonathan MacDonald, retail banking analyst at Datamonitor, said: "The Lloyds results are a step in the right direction, but the bank has a long way to get yet.
"While the figures show a pre-tax profit of £1.6bn, the bank is still 41 per cent owned by the government and still owes billions to the taxpayer. It will be some years before the group is able to cast off the legacy of bad debts left to it by HBOS."
The group was formed in January last year by the government-brokered merger of Lloyds TSB and the debt-stricken HBOS.
Why conveying hard-won confidence is essential
At the top of Lloyds Towers the superlatives were being spread about liberally, writes economics editor Faisal Islam.
Chairman Win Bischoff said that he was "immensely proud for having achieved profit". Chief executive Eric Daniels was "delighted" that the government now has "optionality" on when to sell its 42 per cent stake, now that the share price was up above its 63p purchase price.
The Lloyds top team exuded confidence. And confidence has a vitally important purpose here. Costs have been cut, yes, bad loans are well down as well, and the margin Lloyds takes (the difference between the interest rate it charges for loans versus what it pays for deposits) has also surged.
But make no mistake, Lloyds may be off life support, but it's still wandering around the hospital attached to a drip.
Read more here.
Group chief executive Eric Daniels said he was "very very pleased with our return to profit just one year after the acquisition". He added: "It's good news for the taxpayer and good news for all of our stakeholders".
Lloyds said today that it has opened 880,000 current accounts and 2.6m new savings accounts during the period, and clocked £6.6bn in retail deposits. It boosted its mortgage lending by £14.9bn, including £2.5bn in new lending to first time buyers.
Lloyds shares, which have soared by 44 per cent in a month, were buoyed further by today's results, up by more than 2 per cent by midday today.
Bruce Packard, a banking analyst at Seymour Pierce, said: "Lloyds has reported an accounting profit that is both larger and earlier than expected – but if the last few years has taught us anything, it is that banks can report healthy profits in any one reporting period, but at the same time be storing up trouble for the future."
Earlier today the Royal Bank of Scotland announced it had reached a deal to sell 318 branches to Spanish banking giant Santander.
The sale, comprising 311 RBS-branded branches in England and Wales and seven NatWest sites in Scotland, is set to bolster Santander's position in the business banking sector.
RBS, which is 83 per cent owned by the taxpayer, is disposing of the assets in order to appease European competition concerns.
The sales, which will take up to 18 months to complete, will see Santander pay a premium of £350m on the value of the assets.
Fellow part-nationalised player RBS is also expected to report a return to profitability when it reports on Friday.
In a warning issued ahead of the banking sector's reporting season, Chancellor George Osborne said the sector had an "economic obligation" to lend to companies.
Business Secretary Vince Cable has also called for banks dividends and bonuses to be targeted in a "carrot and stick" move to boost lending to cash-strapped small businesses.
Mr MacDonald said the big picture on banking is that "almost all of the big UK banks are reporting better than expected figures this week".
Investors are still awaiting Barclays and RBS's results, but the mood is upbeat which is boosting share prices and bringing a degree of confidence back to the sector.
"The industry is far from being out of the woods, but these are positive signs," said Mr MacDonald.
