Bad debt provisions at Lloyds TSB rise by 48%

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Peter Ellwood, the chief executive of Lloyds TSB, yesterday said the current turmoil in the "operating, regulatory and stock market environment" was "unprecedented" in his 30 years in banking.

His comments came as the bank revealed it had managed to scrape a £1m increase in half-year profits after raising costs for bad debts.

Lloyds said two corporate defaults in the US, thought to be Enron and WorldCom, as well as risks borne in Argentina meant cover for bad debts had to rise 48 per cent to £479m.

Mr Ellwood said the debts were now 80 per cent provided for and he was not expecting any more lending shocks.

On Thursday, Barclays revealed it was in a similar predicament, as it set aside £713m for bad debts in Argentina and other risky lending sending its profits down 6 per cent.

Maarten van den Bergh, Lloyds' chairman, said to call the past six months "challenging" was an understatement.

Mr van den Bergh and Mr Ellwood are bracing themselves for another tough six months, saying Lloyds' businesses that are sensitive to equity markets could struggle to achieve growth if consumer confidence remains low.

"High-profile corporate failures resulting from irregularities in accounting have increased the destabilisation of global equity and bond markets. These issues have had a direct effect on the group's results and are likely to continue to have an impact going forward until some stability returns," Mr Ellwood said.

Total income rose by 6 per cent to £4.5bn in the six months to 30 June and the trading surplus was up 11 per cent to £2.2bn. Operating expenses increased by 1 per cent to £2.4bn.

Profit before tax increased by £1m to £1.604bn as the group reported strong growth in its UK retail banking division mainly through personal loans and credit card borrowing. Sales of motor and home insurance were also strong and life insurance and pension sales were up 12 per cent.

Analysts, however, felt the results left very little to be excited about, and some expressed concern over where future revenue growth would come from.

Michael Trippitt, an analyst at Bear Stearns, said: "The issues are the same as they were for Barclays. Revenue growth is under the spotlight. They were a solid set of results and show not a bad performance, but I find it difficult to bang the table saying 'buy' on them."

Lloyds shares rose 4p to 590p, while shares in Royal Bank of Scotland, which reports next week, fell 3 per cent to 1470p.

Lloyds is anticipating a slowdown in consumer credit growth and mortgage sales, but Mr Ellwood says he is "quite relaxed" that Lloyds has taken the right lending strategy to ride any downturn.

Earnings per share dropped by 2 per cent to 20p. The board was able to announce an interim dividend increase of 5 per cent to 10.7p per share.

Although the bank is focused on organic growth, once equity markets begin to calm Mr Ellwood is keen to pursue an overseas acquisition. "We are now seeing chief executives looking at cross-border opportunities. We've had a number of people approach us. More people are more interested in talking to us than ever before," he said.

Mr Ellwood assured investors its life insurance and pensions subsidiary Scottish Widows was financially sound with a free asset ratio of 12.4 per cent. The FTSE would have to fall below 3,500 before any additional capital support from Lloyds would be needed.