UK bank Lloyds TSB said today that pre-tax profits plunged to £599m in the first six months of 2008, down 70% from the £1.99bn it recorded for the same period last year. Lloyds TSB chairman Sir Victor Blank blamed the fall on ‘market dislocation’ during a ‘period of considerable turbulence for the financial services sector’, which has been ‘compounded by the marked slowdown of the UK economy as a whole’.
Since it was much less reliant on the wholesale market for funding, Lloyds was supposed to be the one UK bank that would survive the credit crunch relatively unscathed. But it turns out that it wasn’t quite as immune as everyone thought. Even though it had no direct exposure to the US sub-prime market, the bank was forced to write down a whopping £585m on the value of its debt market assets (like CDOs, SIVs and other TLAs), while its insurance business shed £505m as its stock market investments tumbled in value.
But Lloyds was putting a brave face on things today. It insisted that its underlying business was in good shape, pointing out that underlying profit was up 11% if you stripped out this market dislocation (i.e. if you ignore all the bad bits, the results are actually quite good). ‘Against this backdrop, Lloyds TSB continued to deliver good growth momentum in all its core businesses and is well positioned for a lower growth environment,’ Blank claimed today. In fact, it’s even hiked its dividend – albeit by a measly 2%.
And it certainly does seem to have boosted market share in some of its core business areas: for example, its share of new mortgage lending jumped to 24% in the first half, making it the second biggest lender behind Abbey (which booked 26% of new loans) – and it’s been lending at much higher margins too. CEO Eric Daniels isn’t expecting to maintain this as the market recovers, but it’s clear that as one of the few banks with money in the coffers, Lloyds TSB has been filling its boots as others have pulled in their horns.
So it’s true that the bank has probably coped better than most amid the recent upheaval. But a £1.1bn loss is still pretty eye-watering – and it does make us wonder how bad things still might be at some of the banks with more exposure to the fruitier end of the debt markets. After Merrill Lynch was forced into an $8bn cash call earlier this week, this isn’t exactly the confidence booster everyone needed...