Lloyds back in the black as bad debts fall

Lloyds returns to profit sooner than expected. So was the HBOS deal a great idea after all?

Last Updated: 31 Aug 2010

Happy tidings from Lloyds Banking Group this morning: the bank, which is 41% owned by the Government (aka the taxpayer, if it's doing well) said it returned to profitability in the first three months of 2010. That’s sooner than it expected even a month ago; apparently loan write-offs are falling faster than anticipated, while cost-cutting is also well on schedule. That’s good news for Lloyds, since it finally seems to have cleaned up the ordure it inherited when it bought HBOS, and theoretically it’s good news for the taxpayer, since we’re now sitting on a paper profit of £2bn. But as Lloyds looks covetously towards happier financial times, the question is whether it should be allowed to cash in on its new-found strength…

Lloyds made a £6.3bn loss, thanks to a hair-raising £24bn of write-offs on dodgy debts (mostly from the HBOS loan book). So although chief exec Eric Daniels predicted last month that the bank would return to profit for 2010 as a whole, it wasn’t expected to happen quite so soon. However, Lloyds said today that there had been a ‘significant slowing’ in impairments (even though it’s still leaking cash in Ireland on bad property deals). Daniels also said income growth was ‘good’, new current and savings accounts were up, and its net interest margin for the year was running at about 2% (which we’re sure is a big consolation for the shocking rates of interest they’re offering for your savings these days). Lloyds is now trading at about 72p; based on the break-even price of 63p, that gives the taxpayer a paper profit of about £2bn.

All of which would appear to lend weight to the theory espoused by its top brass at the time of the HBOS deal (including in this very organ, by ex-chairman Sir Victor Blank): that it was a great opportunity for Lloyds to complete a transformational deal that wouldn’t otherwise have been possible. And frankly, we can well believe the extra scale Lloyds has gained from swallowing HBOS – which it bought on the cheap, while effectively being allowed to bypass normal competition rules – leaves it well placed to cash in as the economy recovers.

But the broader question is whether or not this is a good thing. Is the enlarged Lloyds now too big to fail (or ‘too big to bail’, as George Osborne put it)? The bank’s subsequent fate may depend on who occupies Number Ten after the Election. Since Gordon Brown waved the deal through, he’s unlikely to clip its wings – but if the Tories get in, or the bank-bashing Lib Dems end up with a bit of influence in the corridors of power, it may not be allowed to reap what it seems to have sown.

In today's bulletin:

Lloyds back in the black as bad debts fall
BP profits soar - as it battles rig explosion
Apple shows its teeth in lost iPhone row?
Imperial Tobacco beats forecasts - but bemoans its lot
Lady Geek: Gaming grandmas are the new geeks

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