There is an air of satisfaction in the City and Whitehall after Lloyds reported yesterday that the bank returned to profit in the first half of the year.
The Government is preparing for a sale of its 39 per cent stake in the lender. Lloyds’ chief executive, Antonio Horta Osorio, is mulling paying a dividend to shareholders for the first time since 2008. That sent the share price up to 74p. So happy days are here again?
Not so fast. A host of unresolved issues surrounds Lloyds, not to mention the structure of the wider UK banking system. Ministers spoke yesterday about getting the best possible value for taxpayers from the sale of Lloyds to institutional investors, but the suspicion remains that they will offload the bank at a price that effectively short-changes the public.
Selling above 61p means the national debt falls. Below, it rises. The attractions of a quick sale at the current price for a Chancellor who has been embarrassed by his inability to bring down the national debt on his promised timetable are obvious. But the price the previous government paid for its £20bn in shares was 74p a share. That’s the true “break-even” price, and sales below that price should not be countenanced. Even at that price it is meaningless to talk of a “profit” on the stake. Think what returns the state could have got for that £20bn investment elsewhere.
And then there is the matter of Lloyds’ lending to the real economy. The bank says it increased its net supply of credit to small firms by 5 per cent in the first half of the year. We hope that’s accurate. But the most recent figures from the Bank of England – which go to March – tell a strikingly different story. They suggest Lloyds has contracted its lending to households and businesses by some £6.6bn since last August, while availing itself of £3bn of cheap funding from the Bank of England.
What about the size issue? Thanks to the disastrous merger with HBOS in 2009, Lloyds is enormous, accounting for twice as much of the stock of home and business loans as the next biggest bank, the Royal Bank of Scotland. The size of Lloyds’ balance sheet will fall when 630 branches are floated off next year. But the bank will still be excessively large. UK firms and borrowers need a broad range of credit providers, not a market dominated by big beasts such as RBS, Lloyds and Barclays.
Lloyds increased its provision for mis-selling of payment protection insurance yet again yesterday in a reminder of just how egregiously it (and the rest of the high street banks) behaved towards customers in the boom years. Leaving this effective cartel untouched would risk this kind of abuse happening again.
A return to profit at Lloyds is good news. But keep the champagne on ice until we have a bank – and a wider banking system – that sustainably serves the needs of the real economy.