As the UK sank back into recession in the first quarter of this year, a leading bank has warned of a long road to economic recovery.
Lloyds Banking Group has said that the UK economy faces a number of challenges ahead, and faces a “long and difficult” recovery period.
The warning comes as Lloyds sets aside an additional £375 million to compensate customers who were mis-sold payment protection insurance, following a spike in complaints in February and March.
This large ring-fencing of funds meant that Lloyds saw a fall in bottom-line pre-tax profits in the first quarter of this year.
The banking group saw a 9% drop in profits to £288 million for the three months to 31 March, down from £316 million in the previous quarter.
Despite the fall in profits, the first quarter of 2012 was significantly better than the first of 2011 – when Lloyds reported losses of £3.5 billion.
After a turbulent period for the Lloyds, and the finance sector in general, the bank is under no illusions when it comes to the future.
“We think that the economy will be reasonably flat this year, but it is going to be a long and difficult recovery,” said Antonio Horta-Osorio, Chief Executive of Lloyds Banking Group.
“We expect it to recover to growth in 2013 and expect unemployment to peak at close to 9% by early next year.”
It is an ominous warning, but one that Lloyds itself is already heeding. The bank is currently in the process of reducing its costs.
Lloyds is trying to streamline its operation, by reducing its loan book, cutting costs, reigning in bad debts, and reducing non-core assets.
“Despite the surprising further provision for PPI redress and the weak income prospects we believe this was a positive update from Lloyds,” said Nic Clarke, an analyst at Charles Stanley.
“It has made good progress de-risking the group balance sheet by reducing non-core assets and improving its funding position.”
Despite the progress made by Lloyds, it is still struggling with its plans to sell 632 branches – highlighting the tough market for banking asset sellers.
Although mistakes have been made by Lloyds in the past, with the bank having to be bailed out by the government, it is trying to put things right with its streamlining measures.
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