Lloyds to lead banking recovery with £800m return to black predicted

Published on Wednesday 28 July 2010 13:59

FALLING bad debt charges are set to drive at least one of Britain's big two part-taxpayer owned banks back into profit this week as the whole sector benefits from the tailwind of an improving economy.

City analysts believe Lloyds Banking Group, 41 per cent owned by the government following its public bailout in the financial sector crisis, will bounce back with a pre-tax profit of at least 800 million for its first trading half, having made aggressive provisions against bad commercial property loans last year. The profit would compare with a 3.9 billion loss at the halfway stage last year.

However, although Royal Bank of Scotland, 82 per cent-owned by the taxpayer, is also seen as having benefited from "kitchen-sinking" bad debt provisions last year, City opinion is sharply divided, with forecasts ranging from a 500m interim loss to a 500m profit.

RBS is expected to announce as early as Tuesday the sale of 318 branches to Banco Santander of Spain ahead of the Scottish bank's results on Friday, with speculation that the sale could raise up to 1.8bn to strengthen the Royal's balance sheet.

Santander kicked off the British bank reporting season with a 10 per cent rise in its UK profits to 875m on Thursday. The sale has been ordered by the EC as part of the price for RBS's taxpayer rescue.

Lloyds had previously indicated to the market that it did not expect to be back in the black before the year end, but said in a spring update that impairment charges had fallen at a faster rate than expected, sparking an upgrade in City forecasts for the interims.

Ian Gordon, analyst at Exane BNP Paribas, expects Lloyds's bad debt provisions to have fallen to 6.6bn in the first half from 13.4bn a year ago. "Lloyds are no longer playing catch-up on provisions related to the HBOS acquisition," he said.

Joseph Dickerson at broker Execution Noble said: "The worst is behind them (Lloyds] for bad debts. They have also benefited from macro-economic improvements. House prices have gone up and unemployment has stabilised."

Dickerson said he was forecasting a 53 per cent decline in commercial impairments and a 26 per cent fall in retail banking impairments for Lloyds, which reports on Wednesday. He is forecasting a pre-tax profit for the bank of 1.7bn.

The turnaround will bolster the position of Lloyds' chief executive Eric Daniels, who narrowly escaped attempts to oust him in the spring

The City will also be interested in what RBS chief executive Stephen Hester has to say about further asset sales, after dividing the bank into core activities like investment banking - which are thought to have performed well - and non-core.

Also expected to report better profits this week are Britain's other big two clearers, HSBC tomorrow and Barclays on Thursday.