Lloyds dragged down by HBOS debts

5 August 2009

Mounting bad debts at HBOS have dragged Lloyds Banking Group to a loss for the first half of the year.

The bank, which is 43% owned by the taxpayer, reported a 43% loss for the six months to the end of June - down from the £2.8 billion profit for the same period in 2008 before it acquired HBOS.

However, the losses are slightly better than the £5 billion forecast by analysts.

Around 80% of the bank's £13.4 billion of bad debts came from HBOS. Before acquiring HBOS, the banking group’s bad debt stood at £2.5 billion.

Chief executive Eric Daniels says that tumbling property prices were at the heart of the problem HBOS loans.

He says: "The decline in property prices had a significant impact on the group's results given the concentration of property assets within the legacy HBOS portfolio.

"The core business delivered a resilient performance, despite the weak economy. We are successfully managing the short-term issues and are well positioned to outperform over the medium term, providing value to our customers and shareholders."

In October, the government was forced to plough £17 billion into Lloyds as HBOS' hefty exposure to the mortgage and commercial property markets weighed heavily on the group.

However, Lloyds said most of the losses were historical and that bad debts were likely to have peaked in the first half of the year.

It expects its performance to pick up in the second half of the year as the economy begins to find its feet.

David Buik, economist of BGC Partners, says: "A recovery in the domestic economy is important for this bank as it gleans very little income from investment banking." 

However, other analysts warn that impairment charges - which reflect the difference between the value of the assets the bank thought it had and their actual worth - could remain high in the coming years, as Lloyds is the most exposed of the UK banks to consumer debt.

The bank could be forced to raise more capital to meet new rules under consideration by the financial regulator the Financial Services Authority and the Bank of England.

In the meantime, Lloyds is working towards achieving annual cost savings of £1.5 billion and so far slashed 9,000 jobs this year.

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