Lloyds will return to profit after fall in bad debt rates

Strong trading so far this year boosts outlook for the partly state-owned bank

Lloyds Banking Group will swing back to profitability this year thanks to faster-than-expected improvements in bad debt rates and strict cost-cutting, the Government-backed bank revealed yesterday.

Annual results for 2009, published last month, recorded £6.3bn of losses at Lloyds, which was crippled by its Treasury-engineered takeover of the ailing HBOS last January and, after £20bn-worth of bailouts, is now 41 per cent owned by the state.

But an unexpected trading update –released yesterday in advance of a conference presentation next week by Eric Daniels, Lloyds' chief executive – confirmed that the first 10 weeks of 2010 have seen "strong" trading and the bank is "pleased with performance against each area of recent guidance".

Existing forecasts regarding Lloyds' plans to boost margins from 1.8 per cent to 2 per cent, and slice out annual costs of £2bn by 2011, remain unchanged, the group said. But a clearer view of debt trends, particularly in the bank's retail business, is behind the battered group's first forecast of a return to the black.

"Impairment provisions are currently trending at lower levels than anticipated and as a result the group now expects to deliver a better impairment performance than previously guided," the bank said yesterday. "The group believes that it will be profitable on a combined businesses basis in 2010."

The company stressed that the revised forecasts result from improved internal modelling and do not reflect an improvement in the bank's "cautious" economic outlook, or improving trends in the housing market.

Alongside the mountainous debts revealed with the 2009 financial results, Lloyds revealed bad loans and charges associated with the HBOS takeover soared by £9bn to £24bn during 2009. But it was already clear that the worst was over. Losses peaked in the first six months of 2009, dropped by 21 per cent between the first and second halves, and were expected to continue falling similarly this year.

Although not willing to commit to a specific figure yesterday, Lloyds says "toxic" debt losses will now fall more sharply in both halves of 2010. The group's stock was the top riser on the FTSE 100 yesterday, rising 8 per cent to 60.13p, raising speculation from some City analysts that the Government's stake could even be sold before the general election.

Elsewhere in Britain's nationalised banking industry, Bradford & Bingley reported annual losses of £196m for 2009. The results came in £71m ahead of expectations and £82m lower than the previous year's losses. But bad-loan losses shot up from £468m to £884m, of which fraud and professional negligence accounted for £388m, the majority of which related to property valuations, the firm revealed. B&B was taken over by the Government in 2008 and its savings business sold to Santander.

"We have made substantial progress against our business objectives and met all of the financial goals in our agreed business plan," B&B's managing director, Richard Banks, said yesterday. "We have completed our restructure to create an organisation that is fit for purpose to deliver a high-quality service whilst reducing costs, minimising losses and delivering value to the taxpayer."