Lloyds: A blip in the recovery


BBC business editor Robert Peston on Llloyds slow return to health

Although Lloyds is back in the black for the first time since the great crash of 2008, its profits actually fell in the second half of last year compared with the first half - from £1.6bn to £609m.

On the so-called statutory measure of profit, Lloyds actually made a loss again in the second half of the year - of just over £1bn.

Much of that deterioration in the latter stages of 2010 was due to Ireland's economic woes.

Lloyds' losses on Irish loans going bad increased by £1.4bn to £4.3bn.

For the bank as a whole, and over the course of the entire year, there was however a reduction of more than £10bn in the overall bad debt charge.

There was strong profits growth in Lloyds' market-leading UK retail bank, while its wholesale operation returned to a fairly substantial profit of £3.3bn.

Another sign that Lloyds is returning to health - after its controversial merger with HBOS two years ago - is that it reduced by £61bn the amount it has in effect borrowed from taxpayers via exceptional loans and guarantees provided by central banks and the Treasury.

But it still has a further £91bn to repay over the coming year and a bit - which it may not find easy.

Update 08:30: I have just interviewed Eric Daniels, who stands down as Lloyds chief executive on Monday (though he will stay on at the bank in an advisory capacity for a few months).

He said he hadn't decided whether to take his £1.45m bonus for 2010. Payment is deferred, he pointed out, and he would decide at a later date whether to actually pocket it.

To the last he has no regrets on the HBOS takeover - even though he stressed in the interview that most of the group's woes over the past couple of years stem from HBOS's lamentably poor corporate loans.

On the Irish losses, he said the bank was being ultra conservative in the provisions it is making against likely future problems with loans there.

And he was confident that Lloyds would be able to repay all that money it has borrowed from taxpayers: he said that since the end of the year, Lloyds has repaid a further £13bn, so it now has to pay back another £83bn in the next year and a bit.

Update 10:11: For those who care about these things, I am told that of the outstanding £83bn owed to taxpayers, around £40bn is money borrowed from the Bank of England via the Special Liquidity Scheme - which has to be repaid in 2012.

And most of the rest is in the form of debt issued by Lloyds and guaranteed by the Treasury via the Credit Guarantee Scheme - which also has to be refinanced over a similar time scale.

At a time when wholesale funding markets are nowhere near as deep or liquid as they were before the Crunch of August 2007, Lloyds is not planning to replace all this public-sector support with commercial debt.

It says that rather than finding new lenders, it plans to "right size the balance sheet" (horrible banker-speak for shrinking its balance sheet), so that it has fewer assets (loans and investments) that need funding.

Which, as if you needed telling, means that there will continue to be constraints on Lloyds ability to provide new loans to households and businesses.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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