Bad debts force Lloyds TSB to raise cover

Bad debts force Lloyds TSB to raise cover

Customers of Lloyds TSB have been having difficulty repaying their loans, forcing the high street bank group to sharply increase its provisions for bad debts in the first half of the year.

The total the bank set aside to cover problem loans to personal customers rose by 21% to £416m. A further £95m was needed to cover corporate loans that had turned sour, taking the total provision for bad debts to £511m.

As the bank reported a 7% rise in six month pre-tax profits to £1.7bn, it emphasised the overall rise in bad debts was just 7% because the provision to cover troublesome corporate loans had fallen.

There was some confusion about the bad debt figure, though, as on a statutory basis the provision for the first half of 2005 was £670m, up 52% on the previous year.

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The bank insisted this was not a true comparison as it used new international accounting standards for this year but existing methods for last year.

The bank's shares fell 7p to 482p, recovering some of the ground lost earlier in the day.

The bank said that part of the rise in the provisions for retail customers was the result of the large number of loans the bank was selling about 18 months ago. At least £20m of the increase was because customers were not making payments on time.

Banking analysts were disappointed by the extent of the rise in bad debts for retail customers. However, Michael Lever, a banks analyst at Credit Suisse First Boston, expects an increase in such charges to be a theme of the bank reporting season, which carries on into next week, when figures from HSBC, Barclays, HBOS and Royal Bank of Scotland are due to come out.

Mr Lever is expecting deteriorations in personal loans, overdrafts and, in particular, credit cards.

Eric Daniels, the Lloyds TSB chief executive, said he was "pretty comfortable" with the bad debt situation. He noted that changes to bankruptcy laws, which made it easier for individuals to protect themselves from their creditors, had also had an impact.

There have been concerns about rising consumer debt and the industry has been under pressure to share credit data about customers to prevent them taking out multiple loans and credit cards. Mr Daniels said he supported the initiative. However, he expressed concern that it might become a way for some financial groups to target customers with new loans.

"I'm very concerned about that," he said, and called for "adequate safeguards" to ensure that such predatory lending practices did not develop in the UK as they had done in his native America.

The retail bank, including mortgage arm Cheltenham & Gloucester, reported a 4% rise in profits to £860m. The insurance arm, including Scottish Widows, made profits of £400m, up 6%, while the corporate banking division was up 14% at £662m.

The bank surprised the City by revealing that its Scottish Widows arm, which some analysts believe should be sold off, would pay a dividend of £500m to the group in the second half. It began to pay its way last year after it was bought by the previous management team in 1999.

However, analysts do not expect the payment to the group's central coffers to translate to a rise into the dividend payment to shareholders. In the first half, the group, which has endured years of speculation that it needs to cut its dividend, maintained the payment at 10.7p a share.

Mr Daniels also played down any suggestions that the bank, built through a series of acquisitions, was seeking out deals or might be bought. Organic growth, he said "is where we see our future".

Guardian Unlimited © Guardian Newspapers Limited 2005