Lloyds warning as profits slump by 21%

Taxpayer-backed Lloyds Banking Group revealed a dip in third- quarter profits today and warned it is in danger of missing its medium-term targets.

Lloyds, which is 41% owned by the Government, said underlying profits fell 21% to £644 million in the three months to September 30, after being hit by weaker demand for loans and higher wholesale funding costs.

The weak third-quarter performance meant the group made bottom-line losses of £3.9 billion in the nine months to September 30 after taking a £3.2 billion hit to cover its mis-selling of Payment Protection Insurance.

Lloyds, which recently revealed that chief executive Antonio Horta-Osorio is on sick leave, said the weak state of the economy could mean its medium-term recovery targets are pushed back to "beyond 2014".

Lloyds also revealed its exposure to riskier eurozone countries increased to £179 million, up from £156 million in the same period a year ago. Within this, it has loaned £52 million to Italy - up from £35 million the previous year.

But it benefited from a "significant reduction" in its impairment charge for bad loans, which fell to £2 billion in the third quarter from £2.8 billion in the previous quarter.

The bigger-than-expected fall in the third quarter meant impairments in the first nine months were £7.4 billion - 22% lower than a year ago.

Its total income was down 9% to £16.1 billion in the first nine months of the year, as demand for loans falls and its margins on loans are squeezed by competition from other lenders.

Lloyds said its performance was resilient given the weakening state of the UK economy over the third quarter of this year.

It said the group's performance reflects "the subdued UK economic environment", its strategy of reducing its riskier loans, and higher wholesale funding costs caused by the eurozone debt crisis.

And it claimed it is on track to deliver its Project Merlin targets for lending to small businesses, having provided £9.6 billion in the first nine months.

Shares were up 5% today, making it one of the biggest risers in the FTSE 100 Index.

Bruce Packard, an analyst at Seymour Pierce, said: "There don't seem to be any monsters in these results."

Lloyds' warning that it may have to push back its medium-term targets echoes a similar warning from taxpayer-backed Royal Bank of Scotland last week when it said it may not hit some of its targets within five years, as previously thought.

It could also mean it takes longer for the taxpayer to get the money back it invested in Lloyds. The Government bought its £21 billion stake in the bank for about 63p per share, but they were trading at just 29p today.

PA