As predicted, Lloyds Banking Group said today that it made a big profit in the first half of the year, thanks largely to a big fall in bad debt provisions - although the surprise came in the size of the surplus, which at £1.6bn was twice as big as the City had been expecting. CEO Eric Daniels (not unreasonably) hailed this as a 'significant milestone', and trumpeted the group's prospects for the coming years. The hope is that - assuming bad debts keep falling - the Augean filth of the HBOS takeover has been well and truly washed out of the books, leaving a behemoth that will clean up on the high street. But it looks like Santander et al will have something to say about that...
Lloyds made a £4bn loss this time last year, so this represents a big improvement. It’s partly a reflection of higher profit margins - or to put it another way, it's squeezing more money out of mugs like us for services rendered. And it's partly because Daniels has stripped out £1bn in costs since the integration (with another £1bn to come by next year). But it was mainly due to a huge drop in the amount it's had to write off against bad debts, which plummeted from £13.4bn to £6.5bn. And Daniels reckons this number's going to keep improving this year and next, as the worst of the HBOS ordure is worked out of the system. Fingers crossed that he's right.
As ever, there's been the usual row about lending (or lack thereof): Daniels insists the bank is ahead of its Government lending targets, but net new lending was actually down on last year (from £627bn to £612bn) because people are paying off their loans faster than Lloyds can dole them out. He reckons there's plenty of credit available, but the demand just isn't there. And do we really want him to rehire all those HBOS bankers who were handing out loans willy-nilly in the boom years?
The bigger question is whether his bullish view of Lloyds' future is justified. The only way for Daniels to justify the short-term pain incurred by the HBOS takeover was that it had a massive upside in the long term; that it was a one-off opportunity to create a market behemoth that could cut costs and make more money from a hugely-enlarged customer base.
But its competitive position is looking weaker than it probably hoped at the time of the deal: the Government is forcing it to give up some of its branch network, and may even push for more sell-offs. Meanwhile Santander is moving aggressively into the UK retail market - the deal announced today for 318 former RBS branches gives it the UK's biggest high-street presence, ahead of HSBC - while new entrants (most recently Metro Bank) are eyeing a slice of the pie. And if the economy takes a turn for the worse, those bad debts may start rising again.
Daniels still hasn't convinced the City that he's the right man for the job (despite Lloyds's protestations to the contrary). And although he deserves plaudits for these numbers, he's not out of the woods yet.
In today's bulletin:
Lloyds smashes forecasts with £1.6bn profit - but challenges remain
Prices up, demand down: Next paints gloomy picture of our prospects
ASA rumbles BT over its big bang ad
Profits improve for ITV as Crozier announces HD deal
Letters from Malawi: The downside of mobile phones