LONDON BRIEFING:The British government has made a paper profit but the bank is failing to meet lending targets, writes FIONA WALSH
AT LAST, some good news for the taxpayer: Lloyds Banking Group, that hastily cobbled together combination of Lloyds TSB and HBOS, is back in the black. There’s more – with Lloyds shares breaking through the 70p level yesterday, at least before the Greek contagion buffeted the market, the British government was sitting on a paper profit of £2 billion on its 41 per cent stake in the group.
Although Lloyds chief executive Eric Daniels told the bank’s shareholders a month ago that he expected a return to profitability in 2010, no one in the City imagined that goal would be achieved as early as the first quarter.
No new figures have been given by the bank, which lost £6.3 billion in 2009 and almost £7 billion the year before, but Daniels made it clear that he expects the recovery to gather pace as the year progresses.
The fragile recovery of the British economy over the opening months of the year has helped the bank and behind the remarkable restoration of its fortunes is a significant reduction in bad debts. The improvement is a welcome relief after last year’s mammoth £24 billion provision, which largely covered ill-judged commercial property loans advanced by HBOS. There remain areas of concern, however, not least Lloyds’s operations in Ireland, where the bank has been forced to make fresh provisions on its troubled commercial real estate portfolio.
Impairments in Ireland were, at least, lower than in the final quarter of 2009 and the bank believes the worst has passed, although it says it will “remain vigilant” to individual lending positions and will “continue to monitor the position of the Irish economy in particular”.
Ireland aside, the picture painted by Britain’s biggest retail bank yesterday was far brighter than anyone could have predicted even a few months ago, let alone at the time of the government bailouts. And the £2 billion of paper profit – with the prospect of more to come – may leave some taxpayers feeling slightly less resentful about their enforced investment in the banking sector.
But is the unexpectedly swift recovery at Lloyds really such good news? The interests of shareholders, taxpayers and customers are rarely aligned and, despite the lack of detail in Lloyds trading update, it was possible to detect yesterday that customers may be about to come off worst.
For a start, Daniels highlighted a noticeable widening of net interest margins – the difference between the returns offered to savers and the charges imposed on borrowers – to 2 per cent over the quarter, up from 1.77 per cent in 2009. He also revealed that lending balances had remained flat, adding fuel to complaints that the state-supported banks are still refusing to lend to customers. Lloyds failed to meet its government-imposed lending targets last year and, like the rest of the banking sector, has been fiercely criticised by consumer groups for keeping savings rates below even the paltry levels implied by a central bank base rate of 0.5 per cent.
As Lloyds returns to financial health, initial fears over its dominance of the market are also likely to resurface. The banking behemoth was created in the dark days following the collapse of Lehman Brothers in September 2008, when Gordon Brown brokered the deal for Lloyds TSB to rescue HBOS. Normal competition concerns were, controversially, set aside and the deal was waived through even though the two banks held a combined 30 per cent share of the UK savings and mortgage market.
The market has concentrated further still since then, with Abbey owner Santander mopping up Alliance & Leicester and Bradford & Bingley’s branch network. Northern Rock, one of the most aggressive lenders before the crisis, is effectively barred from competing too hard while in state ownership.
So for customers unable to get a loan or decent rates of return on their savings, the widening of margins at the banks is not the best of news.
It may be a while, too, before taxpayer cash can be recouped. Certainly, Liberal Democrat finance spokesman Vince Cable, who may well wield influence in a hung parliament, believes the bank stakes should be retained for as long as 10 years. This is vital, he says, if they are to support British business past the dangers of a double-dip recession.
He dismissed the short-term profitability of both Lloyds and RBS as “largely irrelevant” saying their primary task was to maintain flows of credit to sound companies, something they are “failing abysmally” to do as directors instead chase higher share prices and bigger bonuses.
Fiona Walsh writes for the Guardiannewspaper in London
