British bank Lloyds took a 4 billion-pound ($6.5 billion) hit from bad debts in Ireland and margins will not improve this year, taking the shine off a return to profit for the part-nationalized lender.
In Ireland, where voters are today expected to punish the ruling Fianna Fail party for its handling of the financial crisis, bad loans rocketed to 4.3 billion pounds from 2.9 billion in 2009.
Outgoing Chief Executive Eric Daniels said Ireland will remain difficult but he expects bad debts there to improve this year.
The Irish economy remains at very low levels. We view them as sort of bouncing along the bottom, not getting worse but certainly not improving. We would expect for 2011 that we're going to see very modest growth, he told reporters.
Shares in Lloyds, which is Europe's fifth biggest bank by market value and Britain's second biggest behind HSBC, fell 4 percent before trading was halted due to technical problems at the London Stock Exchange..
Traders added that the stock was down 6 percent on the much smaller alternative BATS exchange.
Their results were good but there are still problems on the fringe, such as their bad debts. There is still uncertainty going forward and banks are not the safe investment that they were perceived to be a few years ago, said John Smith, senior fund manager at British investment firm Brown Shipley.
HIGHER RATES TO HIT MARGINS
Lloyds made a pretax profit last year of 2.2 billion pounds ($3.6 billion), 300 million pounds ahead of the average market forecast and having lost 6.3 billion pounds in 2009.
Its results were better than those of loss-making Royal Bank of Scotland but paled in comparison to 6 billion pounds of profits at Barclays.
Losses on bad loans fell 45 percent to 13.2 billion pounds thanks to a slowly improving economic environment, but the bank said that improvement had been capped by its problems in Ireland, which worsened in the last quarter of the year.
The bank also warned margins would not improve this year after rising to 2.1 percent last year from 1.77 percent in 2009, as it saw limited scope to increase prices and wholesale funding costs stay high.
Political turmoil in the Middle East and north Africa has caused oil prices to surge, which in turn is adding to inflationary pressures and driving up the chances of interest rate increases this year.
That could well impact banks' net interest margins, the difference between what they charge for loans and what they pay to borrow.
The results mark the swansong for Daniels, the American who has been chief executive since 2003. Antonio Horta Osorio, the former boss of rival Santander's UK operations, takes over as chief executive on Tuesday.
Horta-Osorio is due to consider the sale of a wide range of assets, including the disposal of several hundred UK retail branches which Daniels said Lloyds were still working upon.
Lloyds is 41 percent owned by the UK government after being bailed out during the credit crisis when it was saddled with billions of pounds of losses from its takeover of troubled rival HBOS in 2008, a deal brokered by the Labour government of the time.
The government also finished with an 83 percent stake in RBS
after it also had to bail out the Scottish bank during the credit crisis.
Horta-Osorio will also have to tackle threats to break up Lloyds and other top UK banks since the country's Independent Commission on Banking (ICB) is considering splitting up the country's top lenders.
Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani this week said Qatar was open to buying stakes in both RBS and Lloyds..
However, Daniels said he thought it unlikely that Britain would sell its RBS and Lloyds shares before the ICB publishes its final report in September.
(Additional reporting by Paul Hoskins; Editing by Greg Mahlich)