£1.6bn Lloyds profit boosts banking recovery hopes

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The Independent Online

Further signs of a revival in fortunes for UK banks emerged today after Lloyds Banking Group racked up bigger-than-expected profits of £1.6 billion.

The half-year surplus smashed City hopes and marked a "significant milestone" for the taxpayer-backed bank following last year's £4 billion loss.

Lloyds said its figures were helped by a more than halving of bad debts, which had brought the group to its knees during the financial crisis.

Today's figures add to a strong interim results season so far and reinforce prospects for a profitable exit from the Government-owned bank assets.

Nationalised Northern Rock yesterday said the "bad bank" was back in profit and part-nationalised player Royal Bank of Scotland is also expected to report profits when it reports on Friday.

But the sector's apparent return to health has increased the pressure on firms to lend more to cast-strapped businesses.

Lloyds, which is 41% owned by the taxpayer after a rescue bail-out two years ago, claimed it was ahead of its Government-set targets as gross lending to businesses reached £24 billion in the first half.

However, only £5.7 billion of this was to small businesses and the bank admitted firms were still paying back more than they were borrowing.

Net lending to households and businesses - which takes into account repayments - dropped 2% to £368 billion and remained flat within the core businesses.

Chief executive Eric Daniels said despite borrowing rates being cheaper now than before the financial crisis, there was little appetite to borrow.

"Credit is available, but the demand simply isn't there," he said.

Prime Minister David Cameron met with Bank of England Governor Mervyn King today when lending levels were likely to have been top of the agenda.

Mr Cameron called yesterday for cash to be diverted from bonuses and executive pay to the "real economy". This followed a stark warning from Chancellor George Osborne ahead of this week's earnings, saying the sector had an "economic obligation" to lend to firms.

Business Secretary Vince Cable has already suggested dividends and bonuses should be targeted in a "carrot and stick" approach to boost lending to cash-strapped small firms.

Lloyds sought to assure it was not starving firms of credit, saying 80% of applications were being approved.

Its results showed a vastly improved bottom line performance following a 51% drop in impairments to £6.6 billion in the half year.

It had been saddled with £13.4 billion in bad debts a year earlier following the rescue takeover of HBOS.

Impairments are set to improve further over the second half and next year, the bank said.

It forecasts the UK will avoid a double-dip recession, predicting growth of 1.3% in 2010 and 2.1% in 2011, while it said house prices will remain static this year and rise 3% next year.

Mr Daniels said: "The first half of 2010 was a significant milestone for Lloyds Banking Group as the group returned to profit."

"Given the business model we have established, coupled with the gradual recovery in economic growth in the UK, we continue to believe that the group is well positioned to deliver a strong financial performance over the coming years."

Its UK retail bank delivered profits of £2.5 billion in the first six months of 2010 against £360 million a year ago.

Customer deposits increased by £6.6 billion or 3% since the end of 2009.

In residential mortgages, the number of customers three months or more in arrears is also now "well below" the peak seen in late 2008, said Lloyds.

Shares in the group rose 3% and Bruce Packard, banking analyst at Seymour Pierce, said Lloyds management should be "congratulated".

But he warned: "This is profit in an accounting sense, rather than an economic sense, given the £132 billion of Government support the group is still receiving."

And its recovery has not come without its price, as Lloyds confirmed it has now axed 16,000 roles since the takeover of HBOS.

Cath Speight - national officer at Unite, which represents the Lloyds workforce - said: "We must not forget that since the formation of the bank there have been over 16,000 jobs lost and those who hold the key to the success of the bank continue to face insecurity and uncertainty about their futures.

"These profits are only possible because of the staff who have worked tirelessly in extremely difficult circumstances."

The Lloyds results will be followed by figures from Barclays tomorrow that are expected to show more robust half-year profits.

Britain's major players are on course to report more than £11 billion in combined profits, after HSBC reported a bumper £7 billion on Monday.