Lloyds warns of a long, hard road ahead

Bad debts fell 36 per cent from a year ago to £1.7bn in the first three months of 2012 and the bank cut its non-core assets by £12.4bn.

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

Lloyds put aside an extra £375m to compensate customers who were mis-sold insurance in the PPI scandal, which led to a nine per cent fall in bottom-line pre-tax profits to £288m in the three months to March 31.

This was down from a £316m profit in the previous quarter, but significantly better than a £3.5bn loss in the first quarter of 2011.

The market was cheered and Lloyds’ shares closed up eight per cent last night, a rise of 2.6p to 33.6p.

Analyst Nic Clarke at Charles Stanley said: “Despite the surprising further provision for PPI redress and the weak income prospects we believe this was a positive update from Lloyds.

“It has made good progress de-risking the group balance sheet by reducing non-core assets and improving its funding position.”

Mr Horta-Osorio said “substantial progress” had been made with the group’s strategic review, including the reduction of non-core assets as it disposed of several businesses in the period, such as its onshore Dubai business to HSBC.

The lender said it now expects to hit targets for reducing its non-core assets in 2013 rather than 2014.

The disposals hit total income, which declined seven per cent to £4.5bn.

Lloyds’ exposure to troubled eurozone countries Portugal, Ireland, Italy, Spain and Greece fell by six per cent to £22.9bn.

Halifax, now owned by Lloyds, reported a significant increase in customers using its switching service, which helps customers to change banks. Further progress with the service resulted in Halifax being awarded a 4* rating from Defaqto, the only bank to achieve this status.

Mr Horta-Osorio said the recent rebranding of Halifax has also gone down well with customers, particularly the launch of the Halifax Savers Prize.

The Savers Prize has received over 800,000 customer registrations since launching seven months ago and it is optimistic of reaching a million customer registrations later in the sum- mer.

Halifax said customers are keen on the draw as it offers them the chance to win a life-changing prize, in addition to earning interest. To date 5,000 customers have claimed prizes to the value of over £2.4m.

Lloyds said it advanced £3.25bn of gross new lending to small businesses in the first quarter and is on track to fulfil its commitment of £12bn of gross new lending to small and medium enterprises in 2012. Net lending to small businesses grew four per cent year on year, compared with a four per cent decline in the wider mar- ket.

Shares in Lloyds have fallen 50 per cent in the last 12 months to around half the 63p price tag paid by the Government for its stake in the throes of the financial cri- sis.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers said: “The likelihood of reaching the Government’s 70p-plus break-even point seems a long way off, even if Lloyds is making slow and steady progress, whilst the absence of a dividend is another drag on enticing potential buyers.”

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

Lloyds’ planned sale of 632 branches to appease the European authorities is dragging on.

Last week it said 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 a European Union competition ruling.

“At the moment we have three options on the table,” said Mr Horta-Osorio, 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.

The Co-Op’s offer has been plagued by regulatory concerns and Lloyds has yet to be convinced that NBNK can offer a viable alternative.

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