In its advertising, Lloyds Banking Group pledges to remain "by your side" - in truth, the bank has little choice.Lloyds is the biggest retail bank in the UK.

Its fortunes are tightly bound to those of its millions of customers who are in the process of trying to deal with the financial impact of what Lloyds calls "the fastest contraction" in economic activity "in modern times".

On Thursday Lloyds reported a loss before tax of £602 million for the first six months of this year.

Loan applications slumped in coronavirus lockdown, lower interest rates damaged profit margins and the bank has written-off £3.8 billion of lending it now assumes will not be repaid.

Credit: PA

There will be more bad debt to come.The bank spies signs of recovery.

Mortgage and car finance applications have returned to pre-crisis levels, so too has debit (but not credit) card spending.Amid the uncertainty, there are signs of prudence and also customer anxiety.

Deposits have risen by an extraordinary £29 billion since January.

Money is being squirrelled away, just in case.



Lloyds says the economic outlook has "significant deteriorated" since it last told us how it was doing at the end of April.

This is not unexpected, at the time the bank's assessment seemed far too rosy.

Credit: Lloyds Banking Group

What happens next depends to a large extent on both the path of the pandemic and unemployment, as furlough support is withdrawn.There's no way of knowing where the economy is heading, but Lloyds see four possible paths forward.

The bank has devised "base," "upside," "downside" and "severe" scenarios - all of them are varying degrees of grim.The bank has made loan impairments based on the "base" case - where the economy contracts by 10% in 2020 and the unemployment rate peaks at 9%.

Credit: Lloyds Banking Group

But it says the "upside" and "downside" outcomes are equally (30%) probable.Happily, the chances of armageddon are estimated to be only 10%.

In its most "severe" scenario the economy shrinks 17.2% this year and the recovery is bloodless.

Unemployment peaks at 12.5% - house prices fall by a third over the next three years.

The only consolation, if worst does happen, is that Lloyds believes it would survive intact, without making demands on the taxpayer.As it stands things are precariously balanced. Lloyds allowed 1.1 million of its customers payment holidays during lockdown.

As of a week ago, 24 July, 750,000 still haven't restarted their monthly direct debits.Those with mortgages, credit cards, personal loans and motor finance are starting to miss payments. There are the early signs of distress. Not everyone will find a way back.