The Times does a slightly better job analysing Lloyds Banking Group's results than the Beeb did on RBS. The article acknowledges the difficulty in reconciling the government's desire for banks to lend more into the economy and management's duty to run a bank responsibly. Lloyds is erring on the side of responsibility, which will clearly upset the government. But Truett Tate is right - where people and companies have borrowed too much, we should be forcing them to deleverage, not keeping them afloat come what may.

Elsewhere, the report notes an oddity in the results which, I'm afraid, don't paint accounting in a good light. Lloyds made an accounting gain of £6.1 billion on its own debt, a transaction that halved its reported debt. It's worth dwelling on this a while, because it's somewhat arcane. A bank's issued debt is on its own balance sheet as a creditor (i.e. things owed to others). Debt can be listed just like shares can. Where the market deems that listed debt should be downgraded (i.e. they think it's now worth less than before) and the issuing bank (in this case Lloyds) has opted to show its debt at fair value, the market's loss becomes Lloyds's gain. Yes, embarrassing but true - accounting standards sanction a company's poor performance translating into a gain in its results. Astonishing, really.

There's a further oddity too. In relation to RBS, I had said in an earlier post that goodwill is almost always positive. This is because usually acquiring companies have to pay more than the fair value of the recognisable assets they acquire. Due to the exceptional circumstances in which Lloyds acquired HBOS, Lloyds actually paid less. This meant it ended up with a negative figure for goodwill - i.e. goodwill that is actually a credit on the balance sheet rather than a debit. During the year, HBOS's portfolio performed dismally and many of their commercial loans had to be impaired. This is a big part of Lloyds's eyewatering £24 billion of impairments. Because these were out of the HBOS portfolio, Lloyds has reassessed the figure it recognised as negative goodwill on acquisition, and there's a big credit offsetting some of the impairment charge in the accounts. This isn't easy to follow and makes the results tricky to digest.

Finally, the article notes that Lloyds doesn't have an investment bank. Tim Worstall observes that RBS does (and a profitable one it is too). One suggested cure for our banking ills is to separate investment ('casino') banking from the more stodgy retail/commercial stuff. Thanks to HBOS's idiotic bet on the one-way nature of UK property valuations, we can see that that solution isn't the panacea it's made out to be.

People who read this post also read:

• Ritchie’s grand plan to nationalise all the banks
• Breaking the bank
• Who gained from the crisis?
• Two types of loss
• Some home truths for critics of RBS

Filed under: Current issues with tags banks, goodwill, lloyds banking group, royal bank of scotland, tim worstall, times