Lloyds and Royal Bank of Scotland are expected to post bumper profits later this week, in a boost for long suffering taxpayers and ordinary investors.
The news comes as Lloyds' CEO Antonio Horta-Osorio hinted the bank was ahead of schedule with its plans to restore its balance sheet and suggested the bank would be able to return to paying high dividends soon.
Lloyds has been unable to pay dividends to shareholders since the taxpayer stepped in to rescue it in 2008.
Results: It is hoped that Lloyds will be able to achieve its target of restoring its dividend next year
It has also had to undergo a transformation of its funding model. In June 2011, £300billion of its total banking assets - £600billion - was funded on the international wholesale markets. Around, £150billion of that was in the form of short term loans from other banks. Now, wholesale funding stands at £170billion, of which £50billion is in the form of short-term loans.
More...
Disgraced RBS boss Sir Fred Goodwin faces the wrath of pensioners
Bailout RBS and Natwest drop customer charter then shut 40 branches
Claiming Lloyd’s had transformed its funding and liquidity position two years ahead of schedule Mr Horta-Osorio told the Daily Telegraph: ‘As we finish our legacy issues, the profitability of the bank is going to increase a lot in the future, and, given we don’t have a usage for those funds, it is obvious that Lloyds will be a high dividend-paying stock in the future, as it has been in the past.'
‘That will be helpful in my opinion in terms of the future privatisation.’
Despite this Mr Horta-Osorio admitted he had not held recent discussion with either the Treasury or UK Financial Investments about the timing of any exit for the Government’s 39 per cent stake in the bank.
Lloyds' share price is still currently nearly ten pence per share short of the share price the Government paid to bail out the bank in 2008.
Today Lloyds’ share price stood at 53.8p against the Government’s ‘in-price’ of 61p.
It comes as experts predict that bank lending to businesses in the UK will increase for the first time in four years.
Lloyds is expected to reveal pre-tax profits of £1.1billion in the first three months of the year, up more than 280 per cent on the same period last year.
This is mainly due to the absence of last year’s huge charges for mis-selling payment protection insurance and interest rate swaps.
RBS, which is 81 per cent owned by taxpayers, is expected to follow this up by bouncing back from a huge loss last year. Analysts have forecast a £300million profit in the first three months against a loss of £1.5billion last year.
The performance of Lloyds in particular is a timely boost as it comes after the Co-op pulled out of a long-standing deal to buy 632 branches that Lloyds was forced to sell by the European Commission as a condition of its taxpayer bailout in 2008.
It is now preparing to float the branches on the stock market as a standalone business, but says it is ‘open to offers’ from firms wanting to buy the business.
Another big loss at either bank may have deterred potential suitors including Sir Richard Branson’s Virgin Bank and private equity firm JC Flowers, which have already bid for 316 RBS branches. RBS shares were trading 0.54p higher today at 295.64p.
Meanwhile, Lloyds took a £250million hit on the sale of its unprofitable Spanish banking business to Banco Sabadell today, although the deal is expected to help boost the bank’s capital position.
Lloyds will take a 1.8 per cent stake in Sabadell, Spain's fifth biggest bank, as part of the deal.
It covers Lloyds' private and retail banking business in Spain, but not the bank's corporate banking operations in the country.
It is believed the sale will boost Lloyds' capital ratio by reducing its risk-weighted assets - against which capital is measured - by £400million.
The bank is cutting its international presence from around 30 countries. It has sold operations or exited from 12 countries in the last two years and has said it wants its presence to be down to less than 15 countries by 2014.
Mr Horta-Osorio stated at the weekend that he hoped Lloyds was becoming a 'boring, dependable and trustworthy retail and SME bank, with no surprises' suggesting his strategy is to return the bank to its roots before the acquisition of TSB 18 years ago, in what was to become the first of the big UK bank mergers.
The deal also allows Lloyds to get out of the risky Spanish property market. The Spanish business held £1.52billion in assets mainly in retail mortgages and deposits.
Lloyds’ Spanish business lost €43million (£36million) last year and further losses were expected in the future.
Elsewhere, bank lending to businesses will go up for the first time in four years, according to the influential Ernst & Young ITEM Club outlook for financial services. It said lending to companies is expected to grow by 3 per cent to £440billion in 2013 and by 8.5 per cent to £477billion in 2014 despite shrinking by 5 per cent last year - its lowest level since 2006
The report said this was the result of a decrease in losses from bad loans and banks having better access to cheap funds on the wholesale markets, rather than the government’s Funding for Lending Scheme.
But it warned this depended on interest rates remaining at record lows.
Andy Baldwin, from Ernst & Young, said: ‘It wouldn’t take a significant shift in interest rates to increase the repayment burden of families and businesses across the UK, at great social cost and with a knock-on effect on lending.’
RBS and Lloyds saw net lending plunge to minus £2.4billion and minus £5.6billion respectively during the second half of last year. Both pointed out that this includes huge reductions in their ‘non-core’ books of toxic loans.