Lloyds seeks guidance on future of IF

LLOYDS Banking Group is to hold talks with the European Commission over the future of Scottish online bank Intelligent Finance after it was withdrawn from last week’s sale of assets to the Co-operative group.

IF, which operates mainly from sites in Edinburgh, Livingston and Rosyth, was a surprise omission in the £750 million deal. Lloyds will now meet EC officials to determine whether it has to find another buyer as IF was included in the parcel of assets which Lloyds was forced to sell in exchange for receiving rescue funding from the taxpayer.

The Co-op, which acquired 632 Lloyds branches, the TSB brand and the Cheltenham & Gloucester mortgage business, rejected IF in order to reduce the liabilities it was prepared to take on to its balance sheet.

“It was part of the original mandate so Lloyds will have to go back to the EC and find out what happens next,” said a source close to the bank.

IF was launched 12 years ago as a pioneer of online banking and at its peak, just before the banking crash, was valued at £700m and employed about 2,300 staff. It is now thought to employ about 1,000. The company was one of the businesses included in Lloyds acquisition of HBOS.

But IF pulled out of selling direct mortgages in 2007 and exited mortgages altogether two years later under a Lloyds restructure, leaving it to offer mainly savings products.

Jim Spowart, the Scot who founded IF, said the business could easily have been sold or floated. Despite being integrated into the main bank, he thinks either option could still be viable – but a buyer would need deep pockets to meet capital requirements. He said he was not involved in any move to acquire it.

“It was a very healthy business that broke even, and it was gathering momentum and pace,” he said.

Lloyds is expected to build on progress made in the first quarter when it reports half-year figures on Thursday.

The taxpayer-backed bank is forecast to report pre-tax profits of about £1.3 billion against a loss of more than £3bn a year earlier. Chief executive Antonio Horta-Osorio is likely to stress the strengthening of the balance sheet, deposit growth and improved lending to small firms. He is unlikely to provide much detail on the bank’s exposure to the Libor rate-rigging scandal.

Ian Gordon, a banking analyst at Investec, said the City will also be interested to see how much the bank’s balance sheet has shrunk in the period as Lloyds scales back its business.

“In the first quarter we saw faster shrinkage than had been expected,” Gordon said. “I expect that will continue, although perhaps not quite as fast. Offsetting that, we should see greater stability in terms of margins.”

Nic Clarke, at Charles Stanley, said Lloyds has made good progress but the process of ridding itself of non-core business continued to weigh on performance.

“It has improved its funding and capital position and the net interest margin was largely unchanged in the first quarter,” he said. “But most importantly in the first quarter of 2012 the bad debt charge was substantially lower than the previous quarter and Q1 2011.”

Barclays is also expected to report a solid improvement this week, with profits forecast at a little under £4bn, compared to £3.6bn the year before.

Gordon said it is unlikely the bank will be able to offer much insight on the potential costs of the Libor fixing scandal.