Lloyds’ direct UK and Irish CRE loan exposure shrinks by £6.2bn over 2013

Lloyds Banking Group reduced its non-core UK direct real estate and Irish commercial property loans by £6.2bn over 2013, leaving just £13.2bn remaining across the two major sub-pools of the bank’s legacy lending for the sector. 

In the bank’s annual results published this morning, Lloyds reported a £4.29bn reduction, or 35.9%, to £7.64bn in the bank’s “non-core UK direct real estate” loan book, which is defined as exposure to the sector that is directly supported by cash flows from property activities.

This excludes Lloyds’ exposure to loans linked to the operating performance of companies, such as loans to hotel, care homes and housebuilder companies.

In addition, Lloyds reduced its Irish commercial real estate loan book by £1.89bn, or by 25.6%, to £5.51bn over 2013 – with the aggregate of the two sub-pools equating to £6.2bn in non-core de-leveraging last year.

Lloyds has achieved this through sustaining a momentum of deleveraging strategies, including consensual asset sales by borrowers, loan portfolio sales and asset disposals following loan enforcements.

The loan-to-value profile of these two legacy real estate loan books indicates that Lloyds has £7.36bn in “direct” UK and Irish commercial real estate loans above 100% LTV, comprised of £3.73bn and £3.56bn, respectively.

This £7.36bn of underwater UK and Irish property loans reflects just over two-thirds, or 68.4%, of all “direct” UK property and Irish commercial real estate loans above £5m and €5m, respectively, and 55.9% of Lloyds’ £13.15bn of all loans inclusive of the bank’s granular non-core debt.

Lloyds’ accelerated de-leveraging across the bank as a whole has shrunk its overall non-core legacy loans to such a level that segmented reporting on core/non-core is discontinued.

Furthermore, Lloyds’ dwindling Corporate Real Estate Business Support Unit (CRE BSU) has now merged with non-core performing property loans as well as non-core corporate loans as a category in its annual results for the first time.

As a result, the annual reduction for CRE BSU, the bank’s division for problems loans which fluidly move between core and non-core in line with performance and restructuring success, cannot be seen as indicative of annual comparable year-on-year changes in Lloyds’ overall deleveraging efforts.

By the end of 2013, Lloyds’ non-core CRE BSU reduced by £6.8bn from £15.7bn to £8.9bn, which is the net position of movements between the bank’s core and non-core property loans, as well as an undisclosed mix of corporate loans which are unrelated to property.

The impairment charge in this portfolio fell to £522m compared to £1.45bn in 2012, which Lloyds said reflects “lower gross charges on a reduced portfolio, favourable market movements on impaired derivatives and the continuing proactive management enabling some write backs on previously impaired loans”.

Lloyds continued: “The portfolio has reduced significantly ahead of expectations primarily due to the momentum on various deleveraging strategies including consensual asset sales by customers, loan sales and asset disposals which totalled £7.4bn (net book value) in the year.”

“We have made further substantial progress in 2013 on our strategy to be the best bank for customers,” said António Horta-Osório, Lloyds’ group chief executive in this morning’s annual results.

“We delivered a significantly improved financial performance while increasing investment in our core franchise and people, strengthening our balance sheet and capital position, reducing costs and risk, and addressing legacy issues.”

HM Treasury still holds a 32.7% stake in Lloyds Banking Group.

Yesterday, CoStar News reported the deleveraging made by Lloyds last year specifically through European commercial and residential loan portfolio sales.

According to CoStar News’ calculations, Lloyds sold 10 European property loan portfolios with an aggregate unpaid loan balance of £6.83bn in 2013, against which the bank recouped approximately £2.95bn.

Last year’s 10 closed European property loan portfolio sales comprises five Continental European loan portfolios, three Irish portfolios – including two which were announced in 2012 but did not close until the first quarter of 2013 – and two UK loan portfolios. The Irish NPLs include considerable residential property loan exposure.

Also yesterday, CoStar News revealed that Lloyds has selected BAML, Cerberus, Marathon and Starwood Capital as the four finalists for its last final Continental European commercial property loan portfolio sale, the €600.1m Project Aberdonia.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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