FTSE turmoil hits Lloyds TSB

Banking giant Lloyds TSB showed it was suffering from a sharp rise in bad debt provisions today as “unprecedented” economic and stock market turmoil left first half profits only marginally above a year ago.

The Argentinian economic crisis and two high profile US corporate failures, certain to be Enron and WorldCom, saw the bank’s bad debt provisions rocket 48% to £479 million in the six months to June 30.

Chief executive Peter Ellwood said the gloomy economic climate and volatility on the stock market had a direct impact on the group’s first half performance and would continue to do so until “some stability returns”.

Pre-tax profits for the half year came in at £1.6 billion, an increase of just £1 million on a year ago, while total income across the business rose to £4.6 billion, a jump of 4%.

Mr Ellwood said he believed the bank had delivered a “solid” set of results and pointed to an 11% jump in trading surplus, profits before bad debts and stock market fluctuations, to £2.2 billion.

He also reassured investors the bank would not have to pump additional capital into its insurance arm Scottish Widows to cover potential liabilities unless the blue-chip FTSE 100 Index fell through the 3,500 barrier.

But Lloyds’s shares fell by 4% in the City just a day after Barclays closed almost 9% lower after showing its bad debt provisions had soared because of the poor global economic climate.

Lloyds said it was writing off a further £30 million of its debt in Argentina while a further £70 million had been set aside to cover its exposure to the two US corporate failures it indicated were in the energy and telecom sectors.

Mr Ellwood, a banker for 31 years, said: “The substantial turmoil surrounding the operating, regulatory and stockmarket environment in which we operate has, in my experience, been unprecedented.”

He added, however, that while the situation was “likely to get slightly worse than better in the near term” part of the growth in bad debts came from winning more business in its retail banking arm.

Lloyds said personal lending surged in the first half with personal loans up 19% and credit card lending 24% higher, fuelling a £25 million increase in profits at the retail banking arm to £243 million.

Gross new mortgage lending during the six month period was 31% higher than a year ago at £8 billion as Lloyds took a 5.9% share of the net new mortgage lending market.

Operating profits from insurance and investments rose by 2% to £785 million despite a 6% fall in sales of life insurance, pensions and unit trusts after a “significantly reduced” customer demand for ISAs.

Mr Ellwood said that while the group was still looking at opportunities to expand in Europe or the US, “99.9%” of its efforts would focus on organic growth. “There is no way we will do a deal unless it is value creating,” he said.

Shareholders will receive an interim dividend of 10.7p per share, up 5% on a year ago, an increase Mr Ellwood said reflected the group’s confidence in the future as well as the volatility on the stock market.

Lloyds shares were down 26p at 560p by lunchtime after the results and Mike Trippett, banking analyst at Bear Stearns, said the company had to prove it could generate higher income growth from its business.

The group is cutting 5,000 jobs under plans announced in February and operating expenses were down 1% in the first half. But Mr Trippett said: “You can’t carry on cutting 1%. There’s only so far you can go.”