Lloyds TSB shocks City with 70% fall in profits

Lloyds TSB's first-half profit fell 70 per cent as market turmoil hit the bottom line and the bank warned of rising mortgage bad debts.

Pre-tax profit fell to £599m because of £585m of writedowns from the credit crunch and £794m of negative volatility at its insurance business as stock markets fell. Analysts had expected profit of £773m, according to a Reuters poll. Britain's largest bank for personal current accounts was the biggest faller in the FTSE 100 index, dropping 4.7 per cent. It was the first bank to post interim results in a reporting season set to provide grim reading for investors.

Lloyds insisted that its underlying business was strong and that the combination of market volatility and writedowns would not be repeated. Underlying profit, stripping out volatility, write-downs and a US legal charge, rose 11 per cent to 2.2bn. Underlying revenue growth of 9 per cent outstripped cost growth of 5 per cent.

Lloyds had returned to favour with investors after avoiding excessive exposure to exotic assets. But concerns are increasing about its capital position and exposure to the slowing UK economy.

Lloyds predicted that house prices would fall by 10-15 per cent this year, with a further drop of about 5 per cent next year – the gloomiest prediction so far from a major mortgage lender. A 12.5 per cent fall in house prices this year would add about £100m to the bank's impairment charge this year, said Tim Tookey, the acting finance director. Eric Daniels, the chief executive, said the chances of a UK recession had increased during this year but said Lloyds still believed the economy would slow rather than go into reverse. Mr Daniels faced repeated questions from analysts about the bank's capital strength. Lloyds has not joined its rivals HBOS, Barclays and Royal Bank of Scotland, who have raised a combined £21bn to shore up their capital buffers.

The bank's equity tier one ratio fell to 6.2 per cent at the end of June from 7.4 per cent at the start of the year. Lloyds increased its interim dividend by 2 per cent to 11.4p a share. Some analysts have speculated that the payout, which has a big 11 per cent yield, would have to be cut in a sharp economic downturn. First-half impairment losses rose 31 per cent to £1.1bn, driven by rising corporate bad debts. "When many banks are asking shareholders for additional capital and others are giving the dividend in scrip [shares] or suspending it, we are continuing to increase it", reflecting the bank's confidence in its prospects, said Mr Daniels.

UK retail banking profits rose 15 per cent for the half-year to £911m. Lloyds said it took market share in mortgages, with 24 per cent of net new lending, and also in other products.

Sir Victor Blank, the chairman, said Lloyds was still on the look-out for acquisition opportunities but added: "Don't hold your breath." The bank now appears unlikely to bid against Santander of Spain for Alliance & Leicester. Lloyds considered a big acquisition in Germany earlier this year but shareholders made it clear they opposed such a deal. Mr Daniels said Lloyds would never make an acquisition that undermined its reputation for prudence.

Its shares closed at 306p.

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