Lloyds Banking Group, under the leadership of its new CEO Antonio Horta-Osorio, is planning to accelerate its “disciplined reduction in non-core assets,” it said this morning.
The part-nationalised bank, in a stock exchange announcement, said it will continue “to divest or run off non-core assets, with a goal of reducing assets in the non-core portfolio by at least half over the four years to the end of 2014”.
At the end of 2010, LBG’s entire commercial property loan book was £78.3bn, while the non-performing loan book – which is housed in the LBG Corporate Real Estate Business Support Unit (CRE BSU) and is managed by managing director Richard Dakin – was £26.2bn.
Last year, LBG managed to sell off £4.1bn in loans and assets combined, which was understood to be a higher scale of deleveraging than the bank thought was achievable.
Dakin’s team work with the borrower by looking at the underlying properties within the non-performing loans and identify business plans that will enable LBG to substantially reduce its exposure to commercial property loans.
Borrowers propose a business plan for the debt workout, which LBG consider in accordance with its risk criteria, which takes into consideration, inter alia, property yield profile, prospects for capital appreciation, capital expenditure requirements, lease lengths, vacancy rates and covenant strength as well as the future refinancing requirement.
Also within CRE BSU, LBG has set up Tennyson, currently an empty standalone property company, which will enable the bank to acquire assets in order to action longer term business plans. Properties will spin off into Tennyson by LBG enforcing on property loans, through appointed LPA receivers, with the property company taking ownership of the assets as well as straight transferring directly owned assets.
While LBG has not yet defined its strategy for what – and when – properties will go into Tennyson, the expectation is it will be poor quality secondary and tertiary stock, which need more time for recovery and capital expenditure to make attractive sales.
LBG Tennyson could either be sold on piecemeal to investors – in a manner similar to the 38-strong Project Flagstaff portfolio – or it could be sold as a property company.
In May, Lloyds appointed Grainger, the UK’s largest listed specialist residential landlord, to asset manage its troubled residential properties in a specially set-up vehicle the Residential Asset Management Portfolio (RAMP).
LBG confirmed that impairments against underperforming loans will reduce in 2011, based on its economic assumptions for the UK and Ireland, including unemployment and stabilising property valuations.
The so far undisclosed non-core asset reductions in the first half of 2011 have enabled LBG to reduce its liquidity support from government and central bank facilities, down £97bn at 31 December 2010 to £37bn at 30 June 2011. A decision has not been taken yet on whether LBG will disclose the scale of its non-core disposals in its half year figures, which will be published in August.
LBG is targeting a return on equity of between 12.5% and 14.5% by the end of 2014 and a Basel 3-compliant tier one capital ratio above 10% in 2013. The bank will issue further new funding of between £5bn and £10bn over the remainder of 2011 across the group.
Lloyds Banking Group’s commercial real estate team is predominantly split between London and Edinburgh.
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