Lloyds Is on the Path to Recovery

Earlier this month, British banking giant Lloyds Banking Group (NYSE: LYG  ) reported that it posted a quarterly profit, although a marginal one, helped by a fall in impairment charges as well as a reduction in costs. Its $16.1 million gain overturned the huge $3.89 billion loss it had reported in the year-ago period.

Taking provisions
The bank partly owned by the U.K. government (41%, following its bailout), had to set aside a further  $608.3 million this quarter, for selling faulty payment protection insurance to customers. That's in addition to the $5.19 billion in fines Lloyds had already paid last year. However, Lloyds isn't alone in having to revise its payment protection insurance provision. Barclays (NYSE: BCS  ) , which slumped to a loss of  $546.67 million, raised its provision by $486.65 million. Royal Bank of Scotland (NYSE: RBS  ) , which is set to report its results later this week, is also set to increase its charge by almost 20%.   

By the book
Faulty payments aside, Lloyds' charismatic CEO, Antonio Horta-Osorio, is looking to bolster the lender's balance sheet through the sale of assets as well as by cutting costs and boosting its capital strength.

The lender reduced its non-core assets to $208 billion -- about 13% of its total assets. On the back of the substantial progress made on the non-core asset reduction front, Lloyds has raised its reduction guidance to $48.6 billion from the earlier $40.55 billion.

In an effort to simplify its business, Lloyds is looking at saving $2.75 billion a year by 2014. It also bettered its loan-to-deposit ratio to 130% from 135% in the previous quarter, reaching the target it had set for 2014. This speaks volumes about the improvement in the bank's liquidity position. To add to the cleaning up and strengthening of its balance sheet, the bank increased its tier 1 capital ratio to 11% from 10% a year ago, way ahead of the 9.5% it is required to have, according to the European Banking Authority. This again indicates a pretty strong capital position for the London bank.

On the right track
The lender seemed to have lost its way toward the end of last year, when Osorio went on an indefinite leave as a result of stress and exhaustion. But this quarter saw a marked improvement in the company's balance sheet.

Lloyds had cautioned investors that 2012 would be a topsy-turvy year, and it said that its goal of reaching a return on equity of somewhere between 12.5% and 14.5% by 2014 would not be met, especially after ending last year with an ROE of negative 6.2%. I think there's still work to do for the British lender, but the return of Osorio to the helm does seem to inspire confidence. The man brought together a number of ailing British banks under Santander's U.K. wing and helped script their turnaround. We can expect him to do the same at Lloyds and it looks as though he's on the right path. Keep track of the Lloyds turnaround with the help of the Fool's free My Watchlist service.

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Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool has a disclosure policy.
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