Lloyds Banking Group reported its first-half results today, and they weren't pretty: a £4bn loss, thanks to another £13.4bn in impairment charges on its bad loans (£73m-a-day, by our maths). 80% of this was apparently due to those reprobates at HBOS, and specifically, their massive misjudged bets on the property sector. The better news - for Lloyds at least - is that it's about to dump all this dross onto us taxpayers, via the Government's Asset Protection Scheme. And there are some signs that Lloyds will soon be able to put this disastrous takeover behind it and start churning out big profits...
The write-offs announced today are even bigger than those in the second half of last year, and show just how lax the lending rules clearly were at HBOS in the pre-Lloyds days. Those business banking loans (mostly to property investors) suffered another £9.7bn in write-downs during the first half of the year, on top of a £9.3bn charge in the second half of last year. So £19bn in 12 months - which according to the BBC's Robert Peston, accounts for about 8% of all the lending in that area. That's spectacularly incompetent.
Lloyds was keen to shift the blame onto its new subsidiary today; CEO Eric Daniels talked about these loans being 'outside the traditional Lloyds low-risk appetite' and said all new lending 'is now being made within the Lloyds risk criteria'. However, it clearly didn't apply said criteria to the takeover deal - if it had done its due diligence properly, it would have realised what a dog HBOS was. Meanwhile Lloyds' own write-offs amounted to about £3bn, and it's also seen margins shrink across the board.
Then again, even this loss of £4bn wasn't quite as bad as the City feared. And at least Lloyds seems to be getting its house in order: it's hiving off about three-quarters of its bad debts into the Asset Protection Scheme, and plans to shrink its balance sheet by about £200bn. We're not sure how this dovetails with the plan for the state-owned bank (and we'll own about 60% of it by the end of the year) to boost lending to businesses and consumers, but Lloyds insists it will do its bit. Daniels also promised cost cuts (via 'synergies' - which presumably means job cuts) of £1.5bn by the end of 2011.
Better still for shareholders (that'll be all of us), Daniels reckons the first half will be as bad as it gets; he's expecting write-downs to be 'significantly lower' in the second half, and thinks the economy will start picking up in 2010. If it does, and he can get this HBOS mess off the books, Lloyds will be in a remarkably strong position: even this year, its income was nearly £12bn, while it had 37% of net new mortgage lending (hence why it rushed ahead with this deal). What's that going to do for competition?
In today's bulletin:
Lloyds sinks to massive loss as it writes off £73m per day
Betfair worth backing as revenues soar again
Editor's blog: Machismo has had its day
Could the recession cause two decades of income loss?
Seven ways to... Manage interns better