The result was far worse than a pessimistic City was expecting and raised fears for high street rivals.

HBOS, which owns Halifax, reports tomorrow and Alliance & Leicester the day after.

Lloyds TSB blamed the global credit crunch and losses in its insurance business. The figures will heighten government fears that more small banks could collapse such as Northern Rock. Lloyds was regarded as the most conservative of the big banks and had won praise for resisting the temptation to make risky loans during the boom years.

Lloyds said it expected house prices to fall by up to 15 per cent this year, which would push tens of thousands of people into negative equity.

Banks have come under fire from consumer groups for squeezing customers with high charges as they themselves struggle with the downturn. Critics of the industry say not enough banking bosses have accepted responsibility for their failures by resigning.

Lloyds TSB chief executive Eric Daniels warned that the British economy was facing a sharp slowdown in the coming months, and will grow by only

1.6 per cent this year – far lower than Treasury estimates of two per cent.

He said the crisis in the financial markets and falling house prices “have impacted consumer confidence and contributed to lower growth” in Britain in the last six months.

Mr Daniels insisted that Lloyds TSB will continue to deliver a strong operating and financial performance”.

Lloyds TSB made £599 million in the six months to June, down from almost £2 billion a year ago. The bank said its underlying performance reflected good “momentum”.

But the City is now fearful of the future prospects for the company. Simon Pilkington, an analyst at Cazenove, said: “The dividend is unsustainable. We perceive a long-term challenge to the group’s capital position.” Bank shares across the world have collapsed this year in the wake of the credit crunch.

This morning Lloyds TSB fell 15p to 306p. It insisted it will not have to raise fresh cash from investors unlike rivals. Royal Bank of Scotland, Barclays and HBOS have all been forced to raise billions of pounds to shore up balance sheets.

Underlying PBT of £1.57bn was down 19% yoy and underlying EPS of 19.6p was down 24% yoy; both were 10% below our forecasts. The interim dividend has been raised by 2%, confounding expectations (not ours) of a cut.

The lower-margin mortgages had a mix effect on overall Banking
Margins, which were flat half-on-half at 2.82%.

The overall impairment charge of £1,099m was up 31% yoy and up 15% hoh; credit
quality trends are deteriorating in both Retail and Wholesale, and we expect this will
accelerate through 2009.

So where does this leave us? We will review our 2008 EPS forecast of 41.7p, but our
forecast of 32.6p for 2009 looks about right. Maintain Hold.

Valuation: Anglos is trading on trough ’08 earnings of just 8.8X and the
recent bounce is just the beginning of a more sustained rally.

“The downward trend in U.K. house prices now seems well established, and we
expect prices to continue falling in the near term,” said credit analyst
Andrew South. “In a separate article published today, our economists forecast
a further drop of around 17% before prices flatten off in 2009.”

“House price declines and rising LTV ratios generally are an indicator of
rising mortgage credit risk, and are therefore an important factor in our
rating analysis for RMBS notes,” Mr. South said. “Ratings on both junior and
senior notes could therefore be sensitive to house price deflation, which we
have explored further in our recently published scenario analyses.”

The news at the trading updates was awful
but not as awful as had been feared. Land writedowns in some cases were not as large as the punditry had expected; Barratt appears to have refinanced successfully and set a precedent for others to follow; two-year
swap rates and fixed rate mortgages are coming down. All is well with the world – or is it?

Most importantly, in our view, is the reaction of those in the front-line, the housebuilders. They are cutting or passing dividends, laying off staff and have not bought their own shares.

In June mortgage approvals were 36,000, another record low. A worrying development for the first-time buyer is that following the demise of the 125% and 100% there are now so few 95% LTV mortgages on offer that the Bank of England has stopped providing data on them as there are now too few products to track.
As we head into the results season we see few, if any, positive share price catalysts.

Later in this note we review the write-downs announced or forewarned so far. We would suggest that reviewing land values appears to be more of an art than a science and that the inadequacy of IAS2 in relation to housebuilding provides significant scope for different interpretations.

Cadogan’s assets are undeveloped discoveries which have been overlooked by previous owners due to poor Soviet-era technology and, until recently, a low gas price.
Management believes the potential of this acreage can be unlocked through modern drilling techniques and Western reservoir management practices. The early indications have been positive.

Estimate that current share price implies only 18% probability of a successful resolution of legal proceedings, but UBS notes that management’s confidence remains high and neither JKX nor Regal lost licences when faced with ownership issues

Sector-leading near-term drilling offers significant upside potential

Cadogan offers stand-out near-term drilling, with several key wells expected to reach target depth by the end of the year.

Initiating with a Buy rating and a 200p price target

Our price target of 200p is set at a 35% discount to underlying NAV of 306p/share to reflect Cadogan’s current licence uncertainties.

At the current share price investors get an attractively priced option on the outcome of the legal proceedings, although risks do remain.