THE SHARP deterioration in the UK economy was underscored in the results of two of its largest banks yesterday as both Lloyds Banking Group and Barclays predicted a sharp increase in bad debt charges this year.

Lloyds, which is part-owned by the British government, said it expected bad debt charges on corporate loans to rise more than 50 per cent in 2009.

Most of the charges, which analysts believe could reach more than £14 billion, arise from property loans made by HBOS which was rescued by Lloyds last year.

Meanwhile, profits in Barclays’ retail and commercial banking arm almost halved in the first three months of 2009 as UK consumers and businesses struggled to repay loans and overdrafts.

The figures helped reverse the recent rally in bank shares, spurred by hopes that financial institutions had put the worst behind them. Shares in Lloyds, which tripled from their low in early March, fell 16.2p to 97p. Barclays shares, up sixfold since early March, fell 12.25p to 275.75p.

However, Barclays’ poor performance in retail and commercial banking was masked by strong growth in Barclays Capital, its investment banking arm. Barcap generated income of £5 billion, more than double the figure for the same period of 2008, helped by booming bond issues and strong trading activity in fixed income, foreign exchange and currencies.

Executives said Barclays had benefited from its 2008 purchase of the US operations of Lehman Brothers, the failed Wall Street bank, which generated about a third of the bank’s income.

Profits at the investment banking and investment management division more than doubled to £1 billion in spite of the bank being forced to lift provisions for potential losses on loans insured by monoline insurers, several of which have been downgraded.

In February Barclays had said it expected an annualised loan loss rate for 2009 equivalent to 1.3-1.5 per cent of its portfolio, against 0.95 per cent in 2008. It now expects the 2009 figure to be at the top end of the range, and hinted that the figure for 2010 could be even higher.

In its brief trading update, Lloyds blamed “rising unemployment, reduced corporate cash flows, the continuing impact of lower house prices and falls in the value of commercial real estate” for the significant rise in impairment levels in its lending portfolios.