Barclays and Lloyds profit hikes may not herald increased lending

Barclays and Lloyds Banking Group have both reported substantial rises in profits for the first six months of 2010, but industry experts say this is unlikely to signal more mortgage lending.

Lloyds group saw a huge jump in pre-tax profits to £1.6bn compared with a loss of £4bn in the first half of 2009.

The group has maintained its 23% share of the gross mortgage market and reduced the amount it sets aside to cover bad loans from £13.4bn to £6.5bn.

Meanwhile, Barclays made a pre-tax profit of £3.95bn, up from £2.75bn a year earlier. It has a 14% share of gross mortgage lending.

But Ray Boulger, senior technical manager at John Charcol, says the dramatic rise in profits is due to a reduction in bad debt and does not necessarily mean the banks will be doing more lending.

He says: “A critical factor in any bank’s ability to lend in the future will be the extent of its repayments to the Special Liquidity Scheme next year.”
Boulger says some lenders will have the funds to repay the money they owe the government but others will fall short and remain unable to access wholesale funding, meaning they won’t be able to increase their lending.

Andy Pratt, chief operating officer of Alexander Hall, says: “I don’t believe there is a correlation between profits increasing and banks lending more.

“Any profit lenders make is good news for their balance sheet but how much of this they’ll have to pay back to the government remains to be seen.”

Northern Rock also revealed last week that its so-called bad bank, Northern Rock Asset Management, has returned to profit.

The arm holds the majority of the bank’s old mortgages and reported a pre-tax profit of £349.7m for the first half of 2010 compared with a loss of £724.2m in the same period last year.