More grim news from Lloyds today: its new subsidiary HBOS lost an eye-watering £10.8bn last year, while Lloyds’ own profits slumped 80% to £807m. But the surprising bit, as far as the City was concerned, was what Lloyds didn’t say: apparently it hasn’t yet reached agreement with the Government about accessing its asset protection scheme. RBS has already signed over £325bn of its dodgiest investments into the scheme, and Lloyds was widely expected to follow suit today. But the bank said only that talks were continuing. Given the disastrous state of HBOS’s finances, and the 20% drop in Lloyds' share price this morning, it had better talk fast...
HBOS’s loan book is clearly Lloyds’ biggest problem. There were £9.9bn of losses on bad loans, £6.8bn of which came courtesy of Peter Cummings’ Bank of Scotland Corporate division. Cummings may have popular with entrepreneurs, but shareholders are probably less keen: apparently almost 12% of the bank’s corporate loans are now in trouble, and the losses already amount to 6% of its entire book. Basically, the division spent far too much money backing housebuilders and property deals, and is now paying the price. It’s a shocking performance by a single division – roughly equivalent to the money lost by the whole of RBS, if you strip out the impact of the ABN deal.
With losses of this magnitude (and more to come, presumably), the bank clearly needs some support from a deep-pocketed backer – and at the moment, that means the Government. That’s why investors have been so spooked by Lloyds’ failure to sign up to the Asset Protection Scheme, which would mean the Treasury back-stopping its losses. The bank said today that talks were ‘progressing and well advanced’ – but the lack of an agreement suggests they’re still haggling over terms. RBS was widely considered to have got a pretty good deal; so either Lloyds is being charged more, or thinks it should be charged less. Either way, there’s no deal yet – and that’s driven its share price down more than 20% this morning.
The whole affair is a huge embarrassment for Lloyds CEO Eric Daniels and chairman Sir Victor Blank, who have again been on the defensive this morning. They still insist that the price was right, and that the deal will come good eventually. ‘Whenever economic conditions do begin to normalise, we believe we will be in a very strong position to reap the benefits,’ Blank said today. But with the taxpayer’s stake surely set to rise well above the 50% mark in the coming weeks, it’s hard to escape the feeling that in the rush to make the takeover happen, the Lloyds hierarchy may not have realised just how bad things were at HBOS.
Speaking of which, the Government is coming under increasing pressure in the row over Sir Fred Goodwin's pension. In a public exchange of letters, Sir Fred (who insists he's not giving up his pension, no matter what his old chum Gordon says) accused Trade Minister Lord Myners of agreeing to the arrangement back in October; for his part, the latter insists that he didn't know it was discretionary. Either way, it doesn't reflect particularly well on the Government's handling of the affair. Myners could be in for an uncomfortable few days...
In today's bulletin:
Lloyds plummets as HBOS slumps to £11bn loss
Luke Johnson on why Channel 4 must stay public
Never too old for air traffic control
General Motors on the ropes after £31bn loss
Lessons in personal matters, from YouTube