Lloyds forced to warn it is likely to miss targets

The crisis-racked Lloyds Banking Group admitted it will probably miss medium-term financial targets as it announced a £3.86bn pre-tax loss for the first nine months against a £1.94bn profit in 2010 just days after its exhausted chief executive took a leave of absence on medical advice.

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Tim Tookey, the outgoing finance director who is now also acting chief executive, would prefer people concentrate on Lloyds' "combined-businesses profit before tax" of £1.75bn and what he called "resilient underlying trading". And the loss was principally due to a £3.2bn provision to cover the cost of mis-selling loan payment protection insurance.

But much of the City's focus was on Lloyds' admittance that it will not meet a number of performance targets beyond 2011. This, Mr Tookey said, was because interest rates are likely to remain at a low of 0.5 per cent for much longer than Lloyds had predicted.

While this means repossessions are low – and Lloyds is Britain's biggest mortgage lender – it also makes it tough for the bank to make a profit on deposits, even as it tries to build them up to reduce a dangerous over-reliance on wholesale funding.

To underline this, Lloyds' net interest margin – the difference between what it pays depositors and what it charges borrowers – declined to 2.1 per cent for the year to date from 2.12 per cent in the first half and 2.2 per cent in the first nine months of 2010.

Yesterday's figures showed wholesale funding is being reduced, with the loan-to-deposit ratio improving to 140 per cent from 156 per cent at the beginning of the year.

But Lloyds still has £282bn on its books, half of which matures in 12 months. Despite this, Mr Tookey said: "We are in a very strong position to deal with any dislocation in any funding position. We have continued to fund even through the difficult period that we've had." The bank was also able to announce a fall in loan impairments to £7.4bn for the first nine months of 2011 against £9.4bn during the same period last year.

The City had shown little confidence in Lloyds in the days leading up to yesterday's interim management statement with the shares falling by 25 per cent in the space of a week. It was during that time that the "temporary" departure of the highly regarded chief executive, Antonio Horta-Osorio, was announced.

There has been speculation that the Portuguese Mr Horta-Osorio, who was poached from Spain's Santander and has brought across a number of well-regarded colleagues, may never return. Mr Tookey did not want to answer questions on this, though Lloyds has been under pressure to begin succession planning. He did say: "My biggest responsibility is to maintain the momentum on everything that is going on in the business so we can give it back to Antonio in good condition."

The bank did find some modest support in the City despite the gloom. Evolution's analyst Ian Gordon said: "For all the hyperbole, today's statement is hardly worse than expected. For all its many faults, we see a clear value opportunity [in Lloyds] at current levels."

Bruce Packard, at Seymour Pierce, said: "There don't seem to be any monsters in these results and we welcome Lloyds' eventual acknowledgement of reality." Shares in Lloyds closed up 1.21p at 28.9p yesterday. The taxpayer has pumped £20bn into Lloyds and will need the shares to rise above 73.6p to be showing a profit.