Lloyds TSB warns Latin American exposure may bring heavy losses

Lloyds TSB, supposedly one of the steadiest high street banks, shocked the City yesterday as it added a warning about potential heavy losses on investments in Argentina and Brazil to its stinging charge for mis-selling endowments.

Britain's third largest bank followed rival Barclays in striking a cautious note about the outlook for the global economy and reinforced the message that all major banks are bracing themselves for an increase in bad debts next year. Lloyds' shares fell 16.5p to 314p.

Lloyds said its credit quality remained robust, but added it could not tell at this point whether it would have to increase its financial buffer against corporate failures and defaults by individuals in Latin America.

Lloyds has a £2.4bn exposure to Brazil after the provisions for bad debts it has already made, emanating from a consumer finance business it owns. It has reduced the exposure from £2.8bn at the end of June by not replacing maturing government bonds.

Lloyds also has a £250m exposure in Argentina from government loans. Lloyds has already increased its bad debt provision for Argentina by £20m at its half-year point in June to a total of £75m.

The bank indicated the country was its main concern, saying "the outlook will remain uncertain at least until the new Argentine government takes office during 2003".

The City expects Lloyds to increase provisions again when it announces results for the full year. Sarah Horder, an analyst at Teather & Greenwood, said: "I imagine we will see an increase in provisions for Argentina and possibly a bit more for Brazil."

Lloyds is forecast to see a drop in its profits in 2002 compared with 2001, when it recorded pre-exceptional pre-tax profits of £4.1bn. Even if there are more corporate failures and market turbulence, Lloyds is expected to escape more lightly than Barclays, Royal Bank of Scotland and HSBC because it has traditionally concentrated far more on domestic retail banking than corporate lending or investment banking.

As well as announcing a £1m fine for misleading customers in the process of selling them endowments, Lloyds said it would make a £40m provision in 2002 for further compensation to be paid to customers for pensions mis-selling claims. The bank said the charge was chiefly due to the fall in the stock market, which has eroded its previous provision for redress.

Peter Ellwood, the chief executive of Lloyds, cautioned that trading conditions were tough in Britain. "The economic outlook for the UK, as well as for all major world economies, remains uncertain," Mr Ellwood said. Nevertheless, Lloyds said that it had continued to experience good market share gains in its main product areas in Britain. In mortgages, market share was up with net new lending in the third quarter at £1.7bn against £2bn for the first six months of the year, creating a 7.4 per cent share of new lending. Lloyds has 9.5 per cent of outstanding mortgages. The bank said retail banking balances on current accounts and savings had increased by 8 per cent.

Staff numbers had fallen by 1,821 to 79,579 in the first nine months of the year.