17 Dec 2010

Irish exposure forces Lloyds to write down loans

Washington Correspondent

Exposure to Ireland’s crippled economy will force Lloyds Banking Group to write down more than £4bn of loans – a “not helpful, but not life-threatening” step, one analyst tells Channel 4 News.

Lloyds Banking Group is facing more pain in Ireland (Reuters)

The surprise statement from Lloyds laid bare the fragility of the recovery in the banking sector.

Lloyds said the size of the losses on its soured property loans had nearly doubled after Ireland shocked the markets by revealing it had sought an 85bn euros rescue package in Europe last month.

“Market sentiment has continued to be negatively affected by uncertainty about the political situation and about the economic impact of the austerity measures introduced in the Irish Budget of 7 December,” Lloyds said in a statement.

Lloyds’ total exposure to Ireland is about £26.7bn. The bank already wrote off about £1.55bn on those loans in the first half of the year.

Read the Channel 4 News special report on the economy: from crash to cuts

Perhaps most surprising, there was no word about any further write-downs during its interim management statement on 2 November. Yet, today, the bank said that, since then, it had seen a “significant deterioration” in market conditions in Ireland, forcing it to write down a further £2.7bn of losses – bringing the total for the year to £4.3bn.

A devastating figure – given that Lloyds is more than 40 per cent owned by the British taxpayer, so any losses borne by Lloyds are equally shared by ordinary people too.

A devastating figure – given that Lloyds is more than 40 per cent owned by the British taxpayer, so any losses borne by Lloyds are equally shared by ordinary people too.

“We are concerned that any economic recovery in the Republic of Ireland may take longer to achieve, and that asset prices will remain depressed for longer than previously anticipated,” Lloyds said.

“While the Board will continue to review the status of the Irish portfolio as the Group prepares its year-end accounts, it believes that the recent significant deterioration in the Irish market will affect the timing and level of value realisation from this portfolio.”

In other words, instead of selling much of its property loans – which the bank inherited from its disastrous takeover of HBOS at the height of the boom – it will now be forced to sit on them and wait for prices to recover, if they do. Or, more likely, write them off altogether.

Britain only ‘partially insulated’

The news from Lloyds comes the same day that the Bank of England warned in its six-monthly Financial Stability Review that Britain’s banks were only “partially insulated” from the crisis raging in Europe.

It said the main risk to the UK banks was from “the possibility of losses on lending to euro-area households and companies, should sovereign and banking concerns spill over to weaker-than-expected growth in the euro area”.

Ireland's economic woes have hit part state-owned bank, Lloyds (Reuters)

Not life-threatening, but not helpful

Christopher Wheeler, European banks analyst at Mediobanca SpA, told Channel 4 News the announcement was “not life-threatening, but not helpful.”

He said: “Clearly what we are seeing is Lloyds recognising reality, and what we all understood would be a problem. The other bank really being hit is KBC, the Belgian bank.

“Given what has been going on in the Irish market, we knew there were loan problems, and now with the austerity measures – it’s all gathered momentum. And it’s ‘what are you going to do, Lloyds?’ It’s pretty obvious there’s going to be problems servicing debt.”

But he said the bank could still make a profit for the second half of the year.

“It is a set back but I think Lloyds will still make money,” he said. “It’s not life-threatening, but not helpful. They are trying to shake off the problems of the past but this shows they are still around.”