Lloyds: Good News and Bad

Perhaps the U.K. is a preview of what's to come over here. See, they had a housing boom and a consumer credit boom, too. and both have ended badly. How badly? According to one source I found, personal bankruptcies were up 73% in the first quarter. Now, that's admittedly not a completely useful number out of context (like "73% higher than what?"), but when you couple that with much higher impairment charges at Motley Fool Inside Value recommendation Lloyds TSB (NYSE: LYG  ) , a picture emerges of the challenges facing this large bank.

Revenue rose 6% in the first half at one of the U.K.'s largest banks. Net interest income grew just 2%, and the net interest margin fell, but overall pre-tax profits were up about 4% as reported. And while the company's return on equity did falter, it still stands at a rather high 23.5%.

From the looks of it, the less that Lloyds had to do with retail banking, the better off it was. Profits in the retail banking segment were up about 2%, but profits in the insurance arm rose almost 10%, and profits in wholesale/international banking rose nearly 11%. Overall lending was higher, but net mortgage lending did decline, and the company seems to be losing some share in the mortgage market.

All that said, things do seem to be going better than many thought. Profit growth was pretty anemic, but it was still better than the median expectation. What's more, the anecdotal evidence suggests that the credit problems in the U.K. are closer to the end than the beginning.

By the same token, Lloyds has its challenges. There is only so far you can go with internal efficiency, and the company's international exposure is pretty limited relative to the likes of HSBC (NYSE: HBC  ) or Barclays (NYSE: BCS  ) , to say nothing of American-based banks like Citigroup (NYSE: C  ) or Motley Fool Income Investor pick Bank of America (NYSE: BAC  ) . I also have some concerns about the recent trend in returns on invested capital, though the absolute level is still quite good.

With a high dividend and the possibility that the worst may be behind the British banking industry, Lloyds could be a reasonable idea for patient investors. My enthusiasm is tempered by its near-term growth prospects and heavy exposure to unsecured lending, but there still appears to be enough pessimism and skepticism to make the stock worth a look.

For more bankable Foolishness:

Philip Durell, lead analyst forMotley Fool Inside Value, continues to recommend Lloyds to his subscribers. Click here for more value investing ideas and a free 30-day trial subscription.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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