Lloyds announces it is likely to make a profit in 2010.
Hot on the heels of news from Royal Bank of Scotland (LSE: RBS) that it is buying back debt on its road back from the abyss comes an announcement from Lloyds Banking Group (LSE: LLOY), on Friday, that it expects to return to profit in 2010.
Industry analysts had been expecting Lloyds to record a pre-tax loss of anything up to £1.4bn by the end of December this year, but it now appears that trading in the first 10 weeks of the year has been strong. Ending 2010 in the black would be quite an achievement for Lloyds, which made a £6.3bn operating loss last year, mainly due to extensive bad loans on the books of Halifax Bank of Scotland, which, with rather catastrophic judgment, Lloyds took over at the beginning of 2009.
Shares in big rise
It was the fallout from that acquisition that saw Lloyds, with its previous reputation as a bank with conservative and profitable business practices, turn, cap in hand, to the government in order to survive. That survival took £20bn of government money, so hopefully the news will be welcomed by taxpayers, who currently own 41% of Lloyds. The response from investors was certainly positive, as the shares rose nearly 10% in early trading.
The turnaround in expectations comes as a result of Lloyd's bad debt situation not looking as bad as had been feared – in banking-speak, its “impairment performance” is improving.
Not such a bad investment?
What does this mean for banks in general? One possible interpretation is that bad debts have been over-estimated across the industry, and that other banks will similarly now be looking at a better 2010 than had been feared. And that might indeed be what investors are thinking, as other banks shares pushed higher today too. Barclays (LSE: BARC), which came out of the crisis rather better than its rivals, gained about 2.5%.
Even RBS, which I earlier suggested might surprise analysts by returning to profit sooner than they expect, gained nearly 6%.
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