Recession In The UK Put Lloyds Under Stress

It has been revealed that with Lloyds Banking Group PLC and the UK government looking for calm fears that the bank will be nationalized, they face a trouble that Lloyds can't control due to depression in UK economy.

However, Lloyds' shares dropped 8.1% on Monday after falling 32% Friday, the day it revealed that it expects to post a £10 billion pretax loss for the year of 2008. The losses stem from souring UK loans as per Lloyds' current acquisition of UK mortgage lender HBOS PLC.

The huge losses have revived worries regarding Lloyds has already 43% government-owned, will drop under government control.

According to government officials nationalization was always a choice that there was no active deliberation of such an attempt. Lloyds' shares fell more than 20% at one point Monday, but ended the day at 56.40 pence.

Similar to other banks, Lloyds' £660 billion loan book consists of UK loans to people and corporations, whose capability to repay them hinges on the severity of unemployment and economic contraction at such time of downturn.

On the other hand, Lloyds already cited those aspects in disclosing Friday's losses. Now the difficulty is that no one knows whether more of the merged Lloyds-HBOS loan portfolio will persist to go worse.

According to Lloyds' spokesman Shane O'Riordain, he refused to comment on whether the bank would need to go back to the government for capital. But he pointed out that "We have capital reserves considerably in excess of regulatory needs, an effective business model and important cost synergies to come from the HBOS acquisition."

Concerns regarding Lloyds come as views on the UK economy turn out to be more negative. In January, the agreement between economists was a 2.2% contraction in gross domestic product in 2009. But a month later, that has turned to 2.6%.

According to a report issued on the UK's economy last week by Business Monitor International Ltd., a London research firm anticipates a 3.5% contraction in real GDP in 2009, also an 11% unemployment rate in 2010, far above the 6.3% unemployment rate in the fourth quarter of 2008. However, a Bank of England report published last week expects that GDP could contract between 2.5% and 6% in 2009.

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