Lloyds’s return to profit hit by Ireland’s financial meltdown

SURGING bad debts in Ireland and a glum outlook for this year’s margins took the shine off a return to full-year profitability for state-backed Lloyds Banking Group.

The group’s departing chief executive Eric Daniels said its merger with Halifax Bank of Scotland, rescued at the height of the financial crisis in 2008, is going “exceedingly well”.

Lloyds made pre-tax profits of £2.2bn in 2010, some £300m ahead of market expectations, after losing £6.3bn in 2009.

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But shares in the lender, 41 per cent owned by the taxpayer, closed down 4.5 per cent at 62.85p yesterday.

Lloyds said charges for bad loans in Ireland rocketed to £4.3bn from £2.9bn in 2009.

“The Irish economy remains at very low levels,” said Mr Daniels. “We view them as sort of bouncing along the bottom, not getting worse but certainly not improving. We would expect for 2011 that we’re going to see very modest growth.”

The total group charge for bad debts fell by 45 per cent from £24bn to £13.2bn thanks to a “slowly improving economic environment”, and predicted this trend will continue.

Chairman Sir Win Bischoff said: “2010 was a year in which we turned the corner. We think the UK economy is going to grow but we think it’s going to grow relatively slowly.”

But the bank also warned net interest margins – the difference between the interest it makes on loans and pays out on deposits – will not improve this year after rising to 2.1 per cent last year from 1.77 per cent in 2009.

It said it saw limited scope to increases prices and wholesale prices remain high.

The group’s total value of bad debts increased by 10 per cent to £64.6bn, driven by increased impairments in its international division.

Mr Daniel said Lloyds’ integration of HBOS, “one of the largest and most complex programmes undertaken in the UK” which has so far cost more than 26,000 job cuts, is ahead of schedule.

He added he is confident the bank will deliver its target of £2bn of annual synergies.

Mr Daniels retires from the bank on Monday but his replacement, former Santander UK chief executive Antonio Horta-Osório, did not attend the company’s results presentation.

Mr Horta-Osório will have to tackle threats to unwind the Lloyds and HBOS merger as the Independent Commission on Banking (ICB) is considering splitting up the UK’s top lenders.

Mr Daniels declined to comment on any potential split, adding he does not expect the Government to begin selling down its stakes in Lloyds and Royal Bank of Scotland until after the ICB’s recommendations have been published.

Mr Horta-Osório is due to lay out his strategy for the lender in June, and leaves Santander after leading it on an opportunistic acquisition spree which saw it pick up Bradford & Bingley’s branch network and savings book, plus the Alliance & Leicester chain.

“He’s very passionate about retail banking,” said Lloyds director of retail banking Helen Weir. “What’s encouraging is he is talking about the importance of the Halifax brand as being a separate challenger to Lloyds.”

In retail banking, Lloyds sees a further two per cent fall in house prices this year. Even so, it expects a “modest” reduction in the retail banking impairments. The division’s pre-tax profits almost quadrupled to £4.7bn.

Ms Weir also reiterated the bank’s commitment to the Halifax brand and its Yorkshire operations.

“We are very clear that Halifax we see as being a key centre for us – both Trinity Road and Copley,” she said.

The bank’s core tier one ratio, a measure of the capital buffer it holds to protect against crises, increased from 8.1 per cent at the end of 2009 to 10.2 per cent.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, described the results as “steady but unexciting progress”.

“Despite pain being incurred in Ireland, as was the case with RBS, and some additional difficulties in Australia, loan impairments showed a significant improvement over the previous year,” said Mr Hunter.

“Cost containment remains on track, with synergies arising from the HBOS acquisition beginning to wash through.

“However, one of the investment headwinds facing the company is the lack of material geographical diversification as enjoyed by some of its rivals, such that Lloyds is seen as something of a play on the UK economy.”