Lloyds Banking Group’s combined non-core UK and Irish property loan books have fallen by £2.9bn to £16.6bn over the six months to the end of June, with as much as £7.7bn in provisioning allowances set aside which appears to at least fully cover expected future write-downs, a CoStar News analysis indicates.
Over the first half of this year, Lloyds’ non-core UK property loan book has fallen by £2.7bn to £9.4bn, while the bank’s Irish loan book – all classified as non-core – has fallen by just £200m to £7.2bn.
This reflects a combined fall of just the UK and Irish non-core property loan book segments from £19.5bn to £16.6bn, against which, Lloyds’ rolling loan provision allowances is £2.8bn for the UK segment and £4.9bn for the more troubled legacy Irish book.
The carrying LTV profile of Lloyds’ non-core UK and Irish property loan books imply the provisioning allowance is at least sufficient to cover expected future losses on asset and loan disposals, as well as enforcements.
This is deduced by the following analysis, by CoStar News, based on Lloyds’ reported carrying loan LTVs in its half-year results published this morning, which implicitly includes the bank’s valuation assumptions, however up-to-date and realistic in time they are proven to be.
On which basis, this analysis seeks to gauge the extent to which Lloyds’ level of provisioning for non-core UK and Irish property loans is sufficient, insufficient or about right.
UK non-core: half the loan book above 100% LTV
Virtually half of Lloyds’ £9.4bn UK non-core loan book – at £4.7bn – is comprised of loans above 100% LTV, including £3.5bn above 125% LTV. This compares to £5.8bn of loans above 100% LTV, or 48.1% of £12.1bn, at the end of 2012.
Assuming, then, that the average LTV in the 101% to 125% LTV sub-pool – covering £1.14bn worth of non-core loans – is 110% LTV, Lloyds could expect to recoup the first £1.04bn, assuming asset or loan sales at par to adjusted fair value.
This leaves just £103.8m exposed to loss, which would need to be absorbed by the £2.8bn in provisioning impairments for the UK non-core segment.
In the final, and larger, LTV sub-pool, at above 125% LTV – which covers £3.5bn worth of loans – assuming the average LTV is 130%, this would imply that £2.72bn worth of capital could be recovered.
This leaves just £814m which would require absorption from the £2.8bn ring-fenced impairment allowance set aside.
The combined £918.4m of likely losses comfortably sits within the £2.8bn in loan provisioning. However, there is also £1.1bn in lending below £5m, for which the LTVs are undisclosed and £455m of unsecured lending, for which losses are likely to be crystallised to some extent.
Ireland: three-quarters of property loans above 125% LTV
Almost three-quarters of Lloyds’ £7.2bn remaining Irish property loans, at £4.4bn or 74%, have a carrying LTV above 125%, against the entire Irish loan book the bank has set aside £4.9bn in provision allowances for future write-downs.
Following the equivalent analysis, assuming, then, that the average LTV in the 125% and above sub-pool for the Irish £7.2bn loan book is 150% – a higher assumption than for the UK loan book, reflecting the greater distress in secondary and tertiary properties which secure Lloyds legacy Irish loans.
An average LTV of 150% across this £4.4bn Irish property loan sub-pool would imply that the first two-thirds – at £2.95bn – could be recovered on disposal.
This would leave an aggregate loss of £1.47bn which will need to be absorbed by the £4.9bn in provisioning allowances which the bank has already set aside.
The sub-pool of loans between 100% and 125% LTV, at £100m, is so fractional a calculation is not necessary.
What does need some scrutiny is the LTV profile of the unsecured and sub €5m loan size sub-pools, at £1.27bn and £1.19bn respectively. However, Lloyds does not provide the breakdown.
But even if the average LTV of the two sub-loan pools was as stressed as in the above sub-pool – the 125% LTV and above pool – and an average of LTV of 150% was applied, the combined £2.46bn worth of loans would see around £1.64bn recouped, leaving £820m of losses requiring absorption from the impairment provision allowance.
Therefore, the combined likely losses amount to £2.29bn which is more than adequately covered by the £4.9bn which Lloyds has set aside, it would seem, implying more than sufficient provisioning based on current evidence.
Of course, if Lloyds trades these loans, or properties, in bulk at steeper discount than current fair valuations, a greater use of the impairment provision allowance would be required. Likewise, the converse is true: if Lloyds trades at better prices, the bank will use even less from the impairment allowance.
If Lloyds does manage exit its remaining £16.6bn non-core UK and Irish property loans without using the allotted £7.7bn, the bank will be able to reclaim the ring-fenced capital back to its wider balance sheet.
Perhaps there is a little good news banked for the future for Lloyds at the end of all of this.