Lloyds TSB, the UK's fifth-biggest bank, said this morning that it made £3.92bn profit in 2007, a 6% increase on the previous year. Apparently it’s written off just £280m on dodgy sub-prime mortgage investments – a not-insignificant sum, admittedly, but peanuts compared to the billion-pound losses suffered by some of its rivals in the City.
And despite the gloomy predictions in the media recently about the slow lingering death of the UK economy, Lloyds actually sounded pretty upbeat about the prospects for 2008. It’s not expecting its wholesale funding costs (the price at which it can borrow money from other institutions) to increase during the year, so it thinks that its margins will actually get better – its impeccable AAA credit rating is clearly giving it a big advantage over other banks here. Throw in a higher dividend (up 5%) and it’s no wonder the share price was up this morning.
Although Lloyds TSB’s (relatively small) investment banking division finished the year slightly in the red (thanks to the sub-prime hit), the retail banking arm has been going great guns. Already the UK’s biggest provider of accounts and loans, it apparently opened more new current accounts than any other bank last year. And CEO Eric Daniels reckons there’s plenty more where that came from, as we start squirreling more of our cash away for impending rainy days.
Even its mortgage business even seems to have had a good year, with £6.7bn of new lending. Lloyds now has over £100bn of outstanding mortgage balances – but unlike some of its rivals, it’s steered well clear of the dodgier end of the market. This means that its share of the mortgage market is smaller than you’d expect, given its size, but it also vastly reduces the chances of it being dragged into the sub-prime ordure.
In other words, it’s succeeded where others have failed thanks to a concept that became very unfashionable in the banking world: caution. ‘Our lower risk strategy limited the impact of the abrupt change in the markets and, consequently, our charge was relatively modest in comparison to our balance sheet size, our earnings, and the charges taken by many other organisations,’ Daniels said this morning, desperately trying to keep a smug grin off his face.
The irony, of course, is that this very strategy was being criticised as over-conservative and backward-thinking twelve months ago. But it looks as though Lloyds may have had the last laugh...