UK BANKING MARKET

Lloyds reported last Wednesday a return to profit in the first half of 2013. There has been an air of quiet satisfaction both in the City and in Whitehall following the banking calamity of 2008.

The Government is now preparing for a sale of its 39 per cent stake in the lender. For the first time since 2008, the bank’s chief executive, Antonio Horta Osorio, is considering paying shareholders a dividend. Expectations of a dividend payment sent the share price up to 74p following the disclosure of the bank’s half-yearly profits.

But the market shouldn’t be so optimistic. A swathe of unresolved issues surrounds Lloyds Banking Group, not to mention the structure and impending reforms of the wider UK banking system.

Ministers in Whitehall have spoken about getting the best possible value for taxpayers from the sale of its stake in Lloyds, but suspicions remain that they will offload the bank at a price that effectively short-changes the public.

Selling above 61p will mean the national debt falling, below that price it rises. The attractiveness of a quick sale at the current market price for a Chancellor who has been embarrassed by his inability to bring down the national debt on his promised timetable should be obvious.

The price the previous government paid for its £20bn in shares was 74p a share. That amounts to being the true ‘break-even’ price, and sales below that should not be countenanced. Even at that price it is meaningless to suggest a ‘profit’ because one should only think what returns the state could have received for that £20bn investment elsewhere. The accounting is important to understand.

Then there is the matter of Lloyds’ lending to the real economy. The bank says it increased its net supply of credit to small firms by 5 per cent in the first half of the year. Financial analysts will hope that is accurate because the most recent figures from the Bank of England (which only go to March) tell a strikingly different story. They suggest Lloyds has contracted its lending to households and firms by some £6.6bn since last August, while availing itself of £3bn of cheap funding from the Bank of England.

And what about the size issue? Following the disastrous merger with HBOS in 2009, Lloyds is enormous. Lloyd’s Bank now accounts for twice as much of the loan stock to home and businesses as the next biggest bank, the Royal Bank of Scotland. The size of Lloyd’s balance sheet will fall next year when 630 branches are floated off following an EU directive, but the bank will still be excessively large. UK firms and borrowers need a broad range of credit providers, not a market dominated by a few such as RBS, Lloyds and Barclays.

Lloyds has increased its provision for the mis-selling of payment protection insurance. This is a reminder of how just egregious the bank (and other high street banks) behaved towards its customers in the boom years. Leaving this cartel untouched would risk this kind of abuse happening again.

A return to profit by Lloyd’s is good news. But we need a bank – and a wider banking system – that is able to sustainably serve the needs of the real economy.