Lacklustre Lloyds' margins squeezed

LOW interest rates and increased competition were to blame for Lloyds Bank's lacklustre interim pre-tax profits which were up 21 per cent to pounds 605m. They were at the bottom end of the City's expectations and reflected a squeeze on domestic margins.

Recovery from recession was the main area of profits growth as bad debt provisions for the UK fell from pounds 272m last time to pounds 184m.

The charge for small business and personal bad debts fell, but Sir Brian Pitman, chief executive, warned that provisions were still rising for medium-sized businesses.

The dividend was increased by 14 per cent to 7.5p from 6.6p, disappointing some analysts who had been expecting a bigger rise. Others marked the shares, which fell 18p to 448p, down because they had expected an announcement on the proposed takeover of the Cheltenham & Gloucester building society. C&G will announce its new proposals to win customers' agreement for the deal next month. 'If people were disappointed perhaps their expectations were too high,' said Sir Robin Ibbs, chairman. 'People need to get accustomed to a low inflation environment.'

Profits from Lloyds' Problem Country Debt portfolio for the half year to 30 June 1994 fell from pounds 176m to pounds 148m. Last time Argentine debt rescheduling enabled Lloyds to release provisions of pounds 154m, while this time the Brazilian programme allowed the bank to release pounds 105m.

Sir Brian said he expected a return to an annual increase in loan demand in 1994 after three years of decline. 'I'm pretty confident that by the end of the year we will see higher average balances than at the beginning.'

UK retail banking and insurance, including profits from the 62 per cent-owned Lloyds Abbey Life, increased its pre-tax profit by 52 per cent from pounds 130m to pounds 198m again driven by a fall in bad debt provisions from pounds 233m to pounds 182m.

Corporate banking and treasury operations increased profits by 58 per cent although turbulence in the securities markets led to a pounds 5m dealing loss. Sir Brian said this would appear 'modest' beside the losses suffered by banks with bigger trading operations.

Private banking profits grew only by 4 per cent, limited by the fall in the markets, since most commissions are taken as a percentage of the securities being deposited or traded by clients.

Lloyds reported improved capital ratios and a higher net domestic margin, but this was offset by a fall in the cost-income ratio.

The bank managed to improve operating profits by 13 per cent despite a rise in revenue of only 5 per cent, because of tight control of costs. Costs as a proportion of income declined to 63 per cent from 65.5 per cent for the first-half of last year. They were up compared with 59.1 per cent in the second-half after interest repayment by Argentina in the second-half of last year. 'The underlying cost-income ratio continued to improve,' said Sir Brian.

He said the overall group net interest margin had declined slightly due to a change in the mix of businesses.

The British domestic margin, which reflects the bulk of the group's net interest income, was up slightly at 3.98 per cent.

'Lloyds is finding it difficult to grow the underlying business,' said analyst Rod Barrett at Goldman Sachs. 'The economy is sluggish and there is a lot of competition around.'

Chris Ellerton at SG Warburg said that the results illustrated the threat posed by increasing domestic competition, particularly from building societies. 'The banks are being extremely complacent about the strength of their position in the personal market.'

(Photograph omitted)