Lloyds hails 'positive trends' after return to profit

Lloyds first quarter performance marks a significant turnaround (AFP/Getty Images)

Part-nationalised Lloyds Banking Group is back in profit and expects to stay out of the red for the rest of 2010 as bad debts shrink, it revealed today.

Lloyds, which is 41% owned by the taxpayer, said "positive trends" in its business and wider economy helped return it to profit in the first quarter, marking a major step forward in its recovery after the financial crisis.

The group did not provide a profit figure, but news it clawed out of the red marks a significant turnaround on the £6.3 billion losses reported for 2009 after the HBOS takeover and credit crunch left Lloyds with £24 billion in bad debts.

It also raises hopes the Government will recoup £20 billion of bailout cash pumped into the bank and Halifax Bank of Scotland, bought by Lloyds in an ill-fated rescue deal at the height of market woes.

Shares are close to the 74p average price paid by the Government, but taking into account the £2.5 billion paid back by Lloyds for avoiding the toxic loan insurance scheme, the taxpayer is already in paper profit on its stake.

Lloyds said its improved first quarter performance was due to a significant slowdown in debts turned sour in both its retail and wholesale divisions.

Improving economic conditions are helping borrowers on to a firmer footing, although Lloyds said the first quarter profits were largely down to a better-than-expected improvement in impairment charges in the wholesale business arm.

The bank cheered the market last month with a prediction for profits this year, but the first quarter result came earlier than expected and the bank hopes to report profits at the half year and full year stage.

Eric Daniels, group chief executive of Lloyds, said: "I am pleased to report that we returned to profitability in the first quarter and expect this momentum to be sustained throughout 2010."

First quarter trading was helped by an increase in customer savings deposits, which grew by more than £5 billion in the quarter.

Overall banking margins - under pressure since interest rates dropped to historic lows - are "trending positively" and the group confirmed aims to deliver a 2% margin for the full year.

Lloyds said it is supporting the economy by lending, but overall lending balances continue to reduce - albeit at a slower pace - as the group pulls out of riskier areas.

It has made lending commitments to the Government in return for state support.

Lloyds exceeded its mortgage lending targets in the year to March, but failed to match business loan commitments as hard-hit businesses instead chose to pay off borrowings.

It has agreed with the Government to lend £44 billion to firms and £3 billion in mortgages in the coming year, but said it expects to lend £67 billion, excluding remortgages, to UK businesses and homeowners.

Lloyds confirmed that cost-cutting targets - to save £2 billion by the end of 2011 - are on track after the HBOS takeover.

Part of these savings have come through mammoth job losses, with Lloyds axing 11,500 roles last year and expecting to cut another 3,500 this year.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said a return to profit "provides a long overdue boost to the beleaguered bank".

He added: "The reduction in impairments represents a significant relief to the economic challenges which Lloyds has been facing.

"While not overplaying the optimism of the outlook for the remainder of the year, the company has stated the real possibility of a full year profit."

Lloyds delivered its trading cheer at an opportune time, coming as it prepares to face long-suffering investors at its annual general meeting next week.

However, the group may face pressure over executive pay and pension policies.

Lloyds has come under fire for awarding Mr Daniels a £2.3 million bonus, despite his move to waive the payout, with the Association of British Insurers raising concerns over the remuneration committee's decision.

The group has also attracted anger from the Lloyds TSB Group Union over claims Mr Daniels and executive director Archie Kane will not be subject to a 2% pensions cap being imposed on other staff from this month.

Lloyds refused to comment on individual pension policies, but said the two executives are moving from a final salary scheme to a defined contribution fund in April 2012 "with no compensation", while it has decided to keep the final salary scheme open to existing members below board level.

Mr Daniels stands to reap a potential £6.2 million in salary and options for 2010 if he can steer the bank to recovery.

It emerged last month that the bank has beefed up its long-term incentive award scheme to allow a maximum of 275% of base salary, although with more stringent performance targets.

Part of the incentive is determined by share price performance, with the bank's shares already near the 75p threshold - above which level payouts vest, with the maximum due if shares reach 114p.