Lloyds Bank sends signal of sector recovery: As first-half reporting season opens, pre-tax profits jump 35% and bad debt provisions take a turn for the better

PRE-TAX profits at Lloyds Bank jumped by 35 per cent in the first half of this year while its bad debt provisions fell significantly, signalling that recovery is decisively under way for Britain's recession-weary banks.

Lloyds made pounds 498m in pre-tax profits compared with pounds 369m in the first six months of 1992. Provisions for bad debts declined by 34 per cent, to pounds 138m from pounds 209m, finally breaking the cycle of rising provisions from the recession.

The bank raised the dividend by 12 per cent from 5.9p to 6.6p, backed by a stronger capital position and a 43 per cent rise in earnings per share.

Brian Pitman, chief executive, said: 'We are not seeing new provisions at the same rate. The bulk of them have already been identified, though we have had to top up some as they got worse . . . Our prudent provisions cover should underpin future earnings and dividend growth.'

The results were also aided by improvements in Lloyds' portfolio of Third World loans. After debt rescheduling agreements were completed with Argentina the bank was able to release a net pounds 154m of provision taken some years ago.

The outcome at Lloyds, the first of Britain's biggest clearing banks to announce interim results, is expected to foreshadow similar or even greater improvements from its rivals reporting in the next two weeks.

Yet the shares closed down 17p at 565p amid stock market disappointment over Lloyds' lower-than-expected operating profits, especially in UK retail banking, and investor profit-taking after a recent run-up in the share price.

Nick Collier, analyst with the investment bank Morgan Stanley, said: 'The other banks probably have more scope to please the stock market than Lloyds because they have had higher bad debt charges, their cost-cutting came later and they should see more growth in capital markets.'

Because Lloyds' profits had held up relatively well during the recession the shares were viewed as less well placed to benefit from recovery than those of its competitors, he added.

The cloud over the results, operating profits before provisions, rose by pounds 55m to pounds 632m, up 10 per cent. The trouble spot was net interest income, the interest on loans and advances. It fell by 6 per cent to pounds 796m, because loan demand remained very weak.

'Continuing weak loan demand' was expected in the low inflation environment, Mr Pitman said.

In contrast, income from fees and commission-earning sources - including current accounts, insurance broking, credit cards and estate agency - rose by 9 per cent to pounds 878m.

In contrast to the frantic lending during the inflationary boom of the late 1980s, bank profits in this low-inflation period would come more from fees and commissions, the bank said.

Sir Robin Ibbs, chairman, added: 'Fee-earning services show good prospects for growth. I think this is the direction in which we are moving. There is probably more income on the fee side than on the lending side.'

All of Lloyds' divisions raised pre- tax profits, but UK retail banking lagged. Though it turned in a pounds 17m profit before tax after a pounds 3m loss a year ago, operating profits fell 4 per cent.

This was caused by a reduction in the value of interest-free balances and pressure on deposit margins - by- products of low interest rates, Mr Pitman said. Bad debt provisions fell to pounds 209m from pounds 241m.

Profits in corporate banking and treasury increased to pounds 92m from pounds 67m a year ago in improved conditions for securities dealing, but declined from pounds 109m in the second half of 1992. Provisions nearly doubled to pounds 38m from pounds 22m a year ago, mainly due to five worsening problem loans that needed increased provisioning.

Lloyds Abbey Life, the life insurance and retail financial services arm which had already reported its results separately, increased pre-tax profits to pounds 153m from pounds 142m.

International banking profits before tax rose to pounds 44m from pounds 38m, while in private banking they rose to pounds 47m from pounds 38m.

Profits on foreign exchange and securities dealing rose to pounds 86m from pounds 58m in the first half of last year, but were below the pounds 117m in second half 1992. International fees and commissions leapt by 30 per cent, helped by the devaluation of sterling, while in the UK they were up a modest 3 per cent. Costs increased by 2 per cent.