Surge in bad loans leaves Lloyds facing full-year loss

Lloyds Banking Group yesterday predicted that its bad debts would rise by half in 2009 as the financial crisis rumbled on, and confirmed it is likely to make a full-year loss.

The part-nationalised lender suffered a "significant rise in impairment" at its lending portfolios in the first quarter, it said in a trading update yesterday.

The shares dropped by more than 10 per cent as the group blamed the economic conditions for the prospective impairments. It cited rising unemployment, falling house prices and a drop in the value of commercial real estate.

Alex Potter, an analyst at Collins Stewart, called the statement "disappointing," adding that the "asset quality was even worse than expectations". He also raised the prospect that the Government's debt rescue package may be renegotiated.

The legacy HBOS portfolios are particularly vulnerable, Lloyds said, and "as a result, corporate impairments in 2009 are expected to be more than 50 per cent higher than in 2008". Retail impairment levels are expected to rise "significantly".

Lloyds' chief executive, Eric Daniels, said the integration of Lloyds TSB and HBOS had made "good progress" despite the challenging market. He added that the group was on course to hit its target of £1.5bn worth of synergies by 2011.

Lloyds said it had delivered "good revenue growth" in the first quarter in its wholesale division. However, it was hit by lower deposit margins and higher funding costs.

The group added that its participation in the Government's Asset Protection Scheme would reduce risk and "significantly strengthen our capital position".