Banking giant warns of long economic recovery for UK

BRITISH BANKING group Lloyds warned of a long, hard economic recovery and set aside an extra £375 million (€459.5 million) to compensate people mis-sold insurance, underscoring the challenge facing Britain’s banks as they battle to recover from financial crisis.

Lloyds, 40 per cent owned by the British government after a bailout during the 2008 crisis, said it was making progress in reducing its loan book, cutting costs and reining in bad debts – all key parts of its recovery plan.

But its planned sale of 632 branches is dragging on, highlighting the tough market facing sellers of British banking assets, and it struck a downbeat tone about the UK economy, which tipped back into recession last quarter.

“We think that the economy will be reasonably flat this year, but it is going to be a long and difficult recovery,” chief executive Antonio Horta-Osorio said.

Barclays chief executive Bob Diamond said last week he had become more cautious about Britain’s prospects, and the bleak assessment was endorsed on Monday by National Australia Banks decision to shrink its UK business and cut 1,400 jobs, blaming an exceptionally tough economic environment.

Lloyds said it made a first-quarter statutory pretax profit of £288 million, down from £316 million in the previous quarter, but significantly better than a £3.5 billion loss in the first quarter of 2011.

Bad debts fell 36 per cent from a year ago to £1.7 billion and the bank cut its non-core assets by £12.4 billion in the quarter, shrinking its bad loans faster than expected.

Lloyds shares closed up 8.4 per cent to 33.60 pence.

Deutsche Bank analysts said profit, net interest margin and bad debt charges were all better than expected.

Britain’s biggest retail bank in terms of customers reported a surge in compensation claims for Payment Protection Insurance (PPI) mis-selling in February and March, partly fuelled by aggressive marketing from claims management companies (CMCs).

Those companies take a sizeable cut of payouts in return for handling the paperwork for clients and Mr Horta-Osorio said bogus claims made by CMCs were driving up the costs for banks.

He said one in four claims made by CMCs were found to be on behalf of people who didn’t even have PPI policies with Lloyds and urged customers to approach Lloyds directly.

“This puts enormous strains on banks because we have to process all complaints. I would advise customers to come directly and avoid paying a third of their money back to CMCs.”

Lloyds said last week it might start talks with new banking venture NBNK about its planned sale of 632 branches after an exclusivity period with The Co-op ended. It is also considering an initial public offering for the branches, which it must sell following an EU competition ruling.

“At the moment we have three options on the table,” Mr Horta-Osorio told reporters, adding the bank will pursue an IPO unless it can be convinced that either of the proposals clearly offers a better option than a flotation. – (Reuters)