Lloyds bad debt hits £13.4bn on HBOS merger

The merger of Lloyds and HBOS today saw the part-state-owned bank report a £4 billion loss in six months.

Lloyds Banking Group, which is 43 per cent owned by the taxpayer, reported more than a five-fold rise in bad debts to £13.4 billion.

The rise in bad debts is higher than forecast and is likely to reignite anger from investors about Lloyds’ rescue of HBOS, which was responsible for four fifths ot the total.

The deal, to which the Prime Minister gave his blessing, has already cost Sir Victor Blank his job as chairman of Lloyds. He is being replaced by Sir Win Bischoff, the former chief executive of Citigroup.

The Prime Minister famously approached Sir Victor at a City dinner last year about merging with HBOS in a bid to save the bank from collapse. However, Lloyds has been heavily criticised for rushing through the merger without conducting thorough due diligence of HBOS. Earlier this year, bad debts from poor investments predominately made by HBOS reached £10 billion.

Lloyds admitted today that 80 per cent of the £13.4 billion impairment charge in the first six months of the year stem from investments made by HBOS. Many of the loans were agreed under the watch of Peter Cummings, HBOS former head of corporate loans, who left the group in January, amid accusations that he had lent far too freely.

Today’s results contrast sharply with Barclays and HSBC which, on Monday, reported a combined profit of £6 billion. Both banks refused to take any taxpayers money to bolster their balance sheets at the height of the banking crisis.

However, Northern Rock, which is fully-owned by the taxpayer, yesterday announced a £724 million loss for the first half after bad debts tripled to £602 million.

Today, Eric Daniels, the embattled chief executive of Lloyds, said: “2008 was a difficult year for the banking industry and the first half of 2009 proved no less challenging.

“The decline in property prices had a significant impact on the group’s results given the concentration of property assets within the legacy HBOS portfolio.”

Despite the rise in bad debts, shares in Lloyds leapt by 10.28 per cent to 92.9p after the bank said that impairment charges had peaked in the first six months of the year.

Mr Daniels said: “While the environment will remain challenging, management expects the economy to stabilise in the second half and start recovering slowing in 2010.”

Also, losses for the six months were below the £5 billion expected by the City.

Because of an accounting quirk, Lloyds reported a statutory profit before tax of £6 billion for the first half due to an £11.2 billion negative goodwill gain associated with the takeover of HBOS.

Pre-tax profits in the group’s retail division slumped from £1.7 billion last year to £360 million, while its wholesale division dropped to a loss of £3.2 billion, from a £37 million profit before. Pre-tax profits at its insurance division fell by 45 per cent to £397 million, and the wealth and international unit recorded a £342 million loss, compared to a £421 million profit last time.

The group said that the integration of Lloyds and HBOS was on schedule to deliver £1.5 billion of annual cost savings by the end of 2011, after it cut more than 8,800 jobs this year.

It said it made £18 billion of mortgage loans in the first half, giving it a 27 per cent share of the UK's gross lending market, down from 30 per cent the year earlier.

The group did not give market share figures for savings and current accounts, although they are thought to be about 20 per cent and 30 per cent, respectively. Roughly half the population are customers of some kind or other, through the bank and its insurance companies, which include Scottish Widows, Esure or Clerical Medical.

The group said that about three quarters of the impairment charge related to assets that are intended for inclusion in the government asset protection scheme, which is designed to cap banks' exposure to toxic loans.

Under the terms of the scheme, Lloyds will have to meet the first £25bn of losses from qualifying loans. Beyond this point the government will absorb 90 per cent of the cost, with Lloyds picking up the remaining 10 per cent.

Source:The times