Lloyds to suffer pain from HBOS's reckless landing

Part-nationalised British lender Lloyds Banking Group is set to bear the scars of reckless lending at its HBOS business today as it reports huge write-downs on bad debts.

Analysts predict the bank could announce a hit of up to £13bn (€15.2bn) as the acquisition of HBOS piles increasing amounts of toxic debt on the balance sheet, largely as a result of commercial property, business and mortgage loans turned sour.

The bank, which is 43% owned by the Government, is expected to report an underlying loss of around £5bn (€5.8bn).

But it could post a headline profit using a raft of one-off items and technical accounting issues relating to the acquisition.

Lloyds, which has already warned investors that it will be loss-making this year, said in May that corporate bad debts would be more than 50% higher than last year.

This is mainly due to the riskier property exposure in HBOS’s corporate lending book. A £6.6bn (€7.7bn) charge was reported last year after the bank’s new owner took a more conservative view of its debts.

The recession has also pulled the rug out from under HBOS’s less sturdy mortgage lending as households struggle to make repayments and house prices plummet.

Rising unemployment means an increasing number of mortgage defaults and while record low interest rates have provided some breathing space for those making repayments, they have also squeezed the bank’s margins.

Meanwhile the pressure is on all banks, particularly those given state support, to increase lending in the downturn and Lloyds has so far committed to £28bn (€32.9bn) in mortgages and business loans over the next two years.

Lloyds could provide details today on talks with the Government about placing £260bn (€305bn) in toxic debt – mostly from HBOS – into a taxpayer-backed insurance scheme to strengthen its balance sheet.

Analysts will be looking for hints on what, if any, parts of the business it could shed as it looks to placate European Commission competition mandarins.

Cost-cutting could also be in focus after recent estimates by the Unite union that 8,200 staff have now been told they are losing their jobs this year.

The bank has managed to return around £2.5bn (€2.9bn) to the taxpayer – although the state is currently sitting on paper losses of around £4.5bn (€5.2bn).

Chairman Sir Victor Blank, who faced criticism for his role in brokering the HBOS takeover and weakening the conservatively-run former Lloyds TSB, is set to retire from his post to placate angry shareholders. He is to be replaced by Sir Win Bischoff in September.

The Lloyds result follows bumper profits for Barclays and HSBC, which together posted £6bn (€7bn) gains.

But the two banks, which both shunned taxpayer help, were helped by strong performances in their investment banking divisions – a boost that the high street-focused Lloyds will be unlikely to replicate.

Royal Bank of Scotland’s figures on Friday will help to put the Lloyds result into perspective, although the 70% state-owned bank does have an investment banking arm to rely on.

Nationalised Northern Rock reported a £724.2m (€851m) loss yesterday as it said the share of its mortgages more than three months in arrears had continued to rise.