‘Underlying business is strong’ says Lloyds TSB

Jul 31 2008 by Iain Laing, The Journal

LLOYDS TSB added to nerves at the start of the bank reporting season yesterday after it revealed more credit crunch losses but assured that its underlying business was strong.

Britain’s fifth largest bank posted a 70% slide in half-year pre-tax profits to £599m after a £585m hit from the credit turmoil and investment writedowns at its insurance arm.

However, the losses seen so far are a fraction of those suffered by its rivals and Lloyds said that on an underlying basis, profits were up 11% to £2.16bn.

Its UK retail arm saw underlying profits rise 15% to £911m as the group’s mortgage business, Cheltenham & Gloucester, took advantage of the wider clampdown in mortgage lending to boost its share of net new business to more than 24%.

The group is now the second biggest lender of new mortgages in the UK behind Abbey, which this week revealed it too has been increasing share, toppling Halifax from the top spot.

The squeeze on hard-pressed mortgage borrowers was highlighted as Lloyds said it had increased profit margins on new home loans.

But there may be some relief for borrowers on the horizon, according to Lloyds.

The bank is expecting rivals that have sharply pulled back lending to start coming back into the market over the next six months.

Eric Daniels, group chief executive, said: “The mortgage market is reaching a new equilibrium.

“We expect lenders in the second half to take a more aggressive stance and put more mortgages out there. So we don’t think we’ll continue to take a 24% share of net new lending.” The “market dislocation“ loss brings the group’s total credit crunch impact so far to £865m.

The £585m interim results hit includes the £387m revealed in the first quarter, but comes on top of the £280m reported last year.

The group said performance was also knocked by a significant drop in the value of investments at its insurance business, as the volatility in stock markets took its toll.

However, Lloyds signalled there would be no multi-billion pound fundraising move to boost its balance sheet.

While rivals such as Barclays, HBOS and Royal Bank of Scotland have turned to shareholders for cash to repair finances knocked by the credit crunch, Lloyds assured its capital position was “very robust”.

The bank also announced a 2% increase in its interim dividend payout to investors at a time when many other banks are cutting or putting dividends on hold.