Blunders at HBOS cost Lloyds £11bn

Lloyds chief executive Eric Daniels said 80% of the write-off on bad loans — £10.7 billion — came from HBOS with as much as £9 billion related to reckless lending on commercial property.

He said the majority of loans made by the Bank of Scotland side of the business before the takeover were "outside the traditional Lloyds low-risk appetite".

It sparked fresh anger from investors over the rescue of HBOS by Lloyds, a deal instigated by Gordon Brown which cost Lloyds chairman Sir Victor Blank his job and has left taxpayers nursing billions of pounds of losses.

Blank is being replaced by former Citigroup chief Sir Win Bischoff.

The revelation came as Lloyds, which is 43% owned by the taxpayer, reported losses of £3.96 billion in the first half of the year against profits of £2.78 billion in the same period of 2008.

Shares in Lloyds jumped 11.72p to 95.86p after the losses came in lower than the £5 billion feared in the City and the £9.5 billion reported in the second half of last year.

The figures left taxpayers sitting on a loss of £3 billion on their investment in Lloyds. They are also £1 billion down on their 70% stake in Royal Bank of Scotland, which reports on Friday.

Daniels said he expected impairments on bad loans to have peaked in the first half of the year having ballooned more than five times to £13.4 billion.

"All new lending is now being made within the Lloyds risk criteria," said Daniels, who is cutting 9000 jobs this year.

Lloyds' figures showed £8.34 billion of the writedowns came from its wholesale division which includes corporate lending by Bank of Scotland.
Many of the loans were agreed by Peter Cummings, the former head of corporate loans at HBOS, and the division slumped to a loss of £3.2 billion from a £37 million profit.

The High Street banking arm was hit by £2.19 billion of bad debts and saw profits fall from £1.7 billion to £360 million.

Profits at the insurance unit, which includes Scottish Widows and Clerical Medical, dropped from £720 million to £397 million.

Lloyds said three quarters of the £13.4 billion of writedowns will be dumped in the Asset Protection Scheme set up by the Government to insure toxic loans, leaving the taxpayer facing yet another bill from the banking crisis.

Under the terms of the deal, Lloyds meets the first £25 billion of losses from the £260 billion of qualifying loans. Beyond that, the taxpayer shoulders 90% of the losses and Lloyds just 10%.
Lloyds wrote off £15 billion last year on bad loans as the recession, rising unemployment and falling property prices hit customers' repayments.

The firm said it now has a detailed understanding of the HBOS books following the rushed takeover last year.

In a sign that the business is returning to its high street roots, the bank said around a third of its total balance sheet, or £300 billion, was made up of assets it deemed to be too risky.

Lloyds said that it plans to run off £200 billion of these assets within the next five years and expects the impact on its incomes to be modest.

The state of the HBOS finances has underlined how the bank went badly wrong under its former bosses Andy Hornby and Sir James Crosby, a key City adviser to Gordon Brown and former deputy chairman of the Financial Services Authority.