Improving credit quality boosts Lloyds

The result was boosted by a huge impairment charge cut: £13.4bn to £6.55bn as the bank successfully grappled with the poor-quality loan book it acquired with HBOS. The worst of HBOS’ book is found in the group's wholesale unit and that’s where the impairment charge fell the most - to £3bn from last year's £9.7bn. But despite this progress, wholesale impairments continue to be dominated by HBOS' grim real estate-focused book.

Lloyds is not the only one reporting much improved earnings on the back of substantially lower bad debt charge. Earlier this week (£7bn) after slashing its impairment charge 46 per cent. State-owned Northern Rock cut its bad debt charge by 54 per cent in the year to end-June and managed a pre-tax profit of £350m – up from a £724m loss a year earlier. Results from Royal Bank of Scotland and Barclays are expected to continue the trend. Indeed, the worst of the impairment crisis could be over over. "Impairment losses will fall moderately in the second half of 2010 with further meaningful reductions in 2011 and beyond," said Lloyds' finance director Tim Tookey.

But credit demand remains weak. Lloyds said that its retail customers are focused on reducing their personal indebtedness and, overall, the bank’s loan book fell £23bn in the year to £672bn - helped by management's deliberate strategy of downsizing the book by £200bn by 2014.