Lloyds sags to loss on hefty bad debts, Irish woes

A sign for a Lloyds TSB branch hangs on the corner of Lloyd's Avenue in the City of London, January 21, 2010.

LONDON (Reuters) - Lloyds Banking Group, Britain's largest retail bank, suffered another big loss last year as it took a 24 billion-pound ($37 billion) hit from bad loans, most of which came from its controversial takeover of rival HBOS.

Its share price fell as much as 7 percent as the bank's optimism that bad debts will drop this year was widely expected, and losses mounted in Ireland where one third of all its loans there are now impaired.

The bank, bailed out by the UK government as a result of the HBOS deal, was one of the first to call a peak in bad debts during 2009 and it expects group impairments to continue reducing at the rate it saw between the first and second half of 2009, when they fell 21 percent.

That trend would imply bad debt charges will drop to about 15 billion pounds this year, despite uncertainty over Ireland where much of its portfolio is real estate-related, but means it is likely to stay loss-making this year, analysts said.

"The loan-to-deposit ratio is way too high and the impairment guidance isn't perhaps as bullish as some people had expected so there is some disappointment out there," analyst Simon Maughan at MF Global said.

Loans as a ratio to deposits dipped to 169 percent from 177 percent, but remains high by industry standards and showed its reliance on wholesale funding.

It expects the ratio to fall to 140 percent "over the next few years." HSBC's loan-to-deposit ratio is under 80 percent and Barclays' is 130 percent.

"Ireland is a classic example of everything that was wrong with HBOS -- late cycle entry into an over-cooked property market where you didn't know the customers, your underwriting standards were poor and you're paying a very heavy price," Maughan said.

Lloyds said its provisioning for Ireland, where it has decided to shut its retail branches, was adequate and it considered Irish bad debts had peaked, but remained wary.

"The economy there is still fragile so it is right to remain cautious," Finance Director Tim Tookey told reporters.

Lloyds, now 41 percent state-owned, posted a loss of 6.3 billion pounds, hit by a 61 percent jump in impairments. That compared to a 6.7 billion loss in 2008. Analysts had on average predicted a loss of 7.1 billion pounds, according to Thomson Reuters I/B/E/S/.

Excluding a 6.1 billion pound accounting gain on its own debt, the loss was 12.4 billion. On a statutory level -- which includes an 11.2 billion goodwill gain on HBOS -- the group made a pretax profit of just over 1 billion pounds.

MARGIN IMPROVEMENTS AHEAD

Lloyds, which completed the deal to take over rival HBOS in January last year, said it saw a slow recovery for the UK economy in 2010, with house prices expected to be broadly flat and its own retail banking margins improving in 2010 and beyond.

It targets 2 percent this year as pricing increases begin to feed through. Margins stood at 1.8 percent in the second half of 2009, an improvement on 1.7 percent in the first six months.

The comments echoed a cautiously positive outlook given by Royal Bank of Scotland on Thursday, which saw improved margins ahead for its retail banking operations.

Lending, however, remained restrained. The bank confirmed it would not meet lending targets agreed with the government early in 2009, with both overall mortgage and business net lending negative on the year as companies paid back debt and demand remained low, with few firms drawing down credit lines.

For the bank's core businesses, net business lending was positive, however, though Lloyds did not disclose figures.

Analysts said impairments and capital ratios were ahead of their expectations but cautioned other elements, including efforts to shrink risk-weighted assets, were less positive.

Citigroup analysts pointed to disappointment over a slight increase in fourth quarter impairments on the previous three months, driven by international -- largely Irish -- loans.

Shares in Lloyds, which have climbed almost 20 percent in the past two weeks, were down 4.2 percent at 52.5 pence by 1542 GMT (10:42 a.m. EST), after falling as low as 50.95p. That is well below the 74p average level at which the government bought its stake in the bank, taking account of Lloyds's bumper rights issue last year.

It said it achieved cost savings of 534 million pounds from the HBOS deal during the year and raised its target for annual synergies expected from the deal to 2 billion a year by 2011. The bank cut over 13,000 jobs last year, ending with 107,000.

Lloyds is being forced to sell hundreds of branches to satisfy EU regulators and compensate for state aid, but CEO Eric Daniels said his priority was improving its balance sheet and completing the HBOS integration.

"You can't do everything at once," he told Reuters.

The bank expects to complete the integration of HBOS branches into its systems at the end of this year, before it can even begin in 2011 to consider which branches to sell.

The bank said earlier this week that Daniels would waive his own bonus but declined to comment on overall payouts for staff, though Chairman Win Bischoff confirmed the compensation-to-revenue ratio would be "a low single figure." Its bonus pool is expected to be about 200 million pounds.

Lloyds said payment for a bonus tax imposed by Britain would "not be significant."

(Editing by Mike Nesbit, Greg Mahlich)

($1=.6521 pounds)