It’s been a painful couple of years for Lloyds Banking Group (as it’s now called), but there seems to be light at the end of the tunnel: after recording losses of more than £6bn in each of the last two years, it’s now predicting that it will swing back into profit in 2010. Admittedly it seems rather strange that ‘massive bank actually makes money’ counts as big news these days. But at least Lloyds seems to be making headway in cleaning out the Augean stables that were the HBOS loan book – and since we own a sizeable chunk of the bank, that’s probably good news for whoever wins the Election…
In a surprise announcement this morning (that sent its share price rocketing nearly 10%), Lloyds said that the bad debts it inherited from HBOS were improving at a faster rate than expected. It’s this dodgy loan book that has been largely responsible for pushing Lloyds so far into the red in recent years – losses of £6.7bn in 2008 and £6.3bn in 2009 have been largely because of the massive write-downs it has had to make as these loans went sour. However, having previously predicted that bad debts would fall by about 20% in the first half of 2010, it’s now expecting them to drop at a much faster rate.
Lloyds also seems to be doing a good job of finding synergies – or, as the unfortunate thousands who have subsequently lost their jobs might call it: ‘ruthlessly stripping out costs and making people redundant’. Either way, Lloyds is now expecting to make a higher-than-expected £2bn worth of annual cost savings, which will be a big boost to its bottom line. It’s also making more money on its savings products (so Lloyds customers should take some of the credit).
All told, Lloyds now reckons that £6bn loss last year could be transformed into a small-ish profit this year. That's a pretty big swing. And it’s also good news for the economy as a whole, because healthy banks can borrow and lend money more cheaply. The other big beneficiary will be the Government, since Lloyds’ faster-than-expected recovery would bring forward the date at which the Treasury can sell our 41% stake - perhaps to as early as next year. That would be a nice little post-Election windfall.
On the other hand, there is a caveat to all this. Lloyds is still being propped up by more than £150bn of state funds, so until it can refinance this debt on commercial terms, it won’t truly be out of the woods. But in the meantime, let's just enjoy the fact that it's no longer quite the basket case it looked a while back...
In today's bulletin:
Shock horror: Lloyds might actually make a profit this year
Mike Ashley gets short shrift from Blacks Leisure
Dragons Bannatyne and Caan get fiery over non-dom row
Use Budget to slash tax, says small business group
MT talks to Brora's Victoria Stapleton