Lloyds TSB profit dives on writedown

By Steve Slater

LONDON (Reuters) - Lloyds TSB reported a 70 percent drop in first-half profits following a 585 million pound hit from its exposure to risky assets and warned that bad debts on mortgages are rising as house prices fall.

The first UK bank to report interim results, it missed analysts' forecasts, its core capital ratio was lower than expected and some expressed concern about further mortgage impairments this year.

Shares in Britain's fifth-largest bank were down 2 percent to 316 pence by 10:20 a.m. on Wednesday, lagging a stronger UK stock market.

"The underlying growth is good but the flagged impairment charge for the mortgage book in the second half is perhaps heavier than expected," said Mike Trippitt, analyst at Oriel Securities.

"The statement flags that they cannot continue to grow at the rate we've seen in the last few years given the economic environment in which they are operating."

First-half impairment losses rose 31 percent to 1.1 billion pounds and mortgage arrears were expected to continue to rise.

Lloyds predicted that UK house prices will fall by 10-15 percent this year, which it said could add 100 million pounds to bad debts in the second half, and prices could fall 5 percent more in 2009.

Statutory profit for the six months to the end of June was 599 million pounds, down from 1.99 billion a year earlier due to its writedown and adverse insurance volatility.