HBOS deal leads Lloyds to £3.96 billion loss

Lloyds Banking Group made a pre-tax £3.96 billion loss on a pro forma basis in the first half of 2009, primarily due to losses on commercial real estate assets held by HBOS, which it acquired in January.

The bank suffered £13.4 billion of impairment charges in the reporting period, of which HBOS’s toxic real estate assets accounted for 80%. Lloyds said impairments were "anticipated to have peaked" in the first half, and that approximately three quarters of these assets are expected to be included in the UK government’s Asset Protection Scheme.

The biggest losses were in the bank’s wholesale business, which made a loss of £3.21 billion. However, higher sales and trading activity, and the absence of treasury writedowns meant this figure was reduced from the £10.52 billion loss incurred in the second half of 2008.

Profits for the firm’s retail business were down to £360 million from £1.74 billion in the first half of 2008 due to lower deposit margins and reduced income on payment protection insurance.

The bank also benefited from £11.17 billion in negative goodwill because the consideration paid to acquire HBOS was less than the fair value of the net assets acquired. Despite this gain, Lloyds said it would have made a statutory pre-tax profit of £6 billion had it not been for the HBOS merger and associated losses.

The bank said a pro forma calculation of its results was more meaningful in light of the acquisition of HBOS on January 16. The results include the assumption HBOS had been owned throughout the full reporting period, and in 2008, to make disclosures comparable.

Elsewhere, Société Générale released its second-quarter results today, recording a profit of €309 million. In the first quarter of the year the bank made a loss of €278 million.

The bank’s most profitable businesses were private banking, and commercial and investment banking. The latter division generated a €1.29 billion profit compared with a profit of €655 million in the same quarter in the previous year.

However, the commercial and investment banking business was also the area where the bank suffered its biggest writedowns. The firm lost €459 million on the tightening of its credit spreads, compared with a profit of €132 million in the first quarter. This also resulted in a €840 million loss on changes in the mark-to-market value of credit default swaps used to hedge its corporate credit portfolio.

See also: Lloyds asset protection scheme talks stall as HBOS losses confirmed
Lloyds' HBOS losses highlight flaws in FSA capital measures

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