Lloyds and RBS set for profit return

City expects part-taxpayer owned banks to shrug off bad debts in Ireland and claims for PPI mis-selling

ROYAL Bank of Scotland and Lloyds Banking Group are set to return to profit this week despite being dogged by bad debts in Ireland and a spike in claims for mis-selling of personal protection insurance.

The City expects RBS to unveil first-quarter operating profits of about £800 million, and Lloyds to be modestly back in the black at both operating and pre-tax level.

The bounce‑back comes after RBS struck a loss of £766m in 2011, impacted by a £950m provision for mis-selling payment protection insurance (PPI).

Lloyds sank £3.5 billion into the red last year as it took a £3.2bn hit from the PPI scandal.

Last week Barclays announced an extra £300m provision for PPI on top of an earlier £1bn at its Q1 results, when finance director Chris Lucas said the group had seen a “considerable spike up in the number of claims” in March.

A banking industry executive told Scotland on Sunday: “All banks are suffering a sharp rise in PPI claims recently, a mix of genuine cases and ambulance-chasers.

“It is a phenomenon affecting the whole industry. If either RBS or Lloyds increases their provisioning claims this week it is more likely to be the Royal as Lloyds’s earlier provision was such a big one.”

Both partly taxpayer-owned banks will also post hefty bad debt charges in commercial property in their Irish businesses, even though overall bad debt charges are expected to continue to fall.

In 2011 RBS’s Ulster Bank subsidiary saw losses rise more than a third to £1bn from £761m, as bad debts rose to £1.38bn from £1.16bn.

That bleak picture is likely to have continued across the Irish Sea for both groups in the first three months of this year.

Simon Willis, banking specialist at broker Daniel Stewart, said: “Both Lloyds and RBS got past the hump in their core bad debt books. But it is still a substantial issue and the rate of improvement in group impairments is likely to have slowed.”

Revenue growth has also remained under pressure in the latest trading quarter after a similar picture in 2011. Analysts say this is due to the downsizing of the loan books of Lloyds and RBS and difficult trading conditions in the Eurozone.

Antonio Horta‑Osorio, Lloyds’s chief executive, revealed at the annual results in February that revenues fell 10 per cent in 2011 and forecast a similar picture for 2012.

However, one analyst said RBS and Lloyds are likely to have benefited, even if only indirectly, from the Long-Term Refinancing Operations (LTRO) of the European Central Bank, seen as having given a financial lifeline to the troubled Eurozone.

“RBS has availed itself of the LTRO, and Lloyds might confirm it has also used it,” he said. “Even banks that don’t directly access it benefit as the web of international finance is so inter-related.”

The market expects Lloyds, reporting on Tuesday, and RBS, which announces numbers on Friday, to confirm that net interest margins – the difference between the interest they charge on loans and pay on deposits – were squeezed again as Britain returned to recession in the first quarter of 2012.