Lloyds Finds Pounds 80bn of High-Risk Loans at HBOS

By Farrell, Sean | The Independent (London, England), February 28, 2009 | Go to article overview
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Lloyds Finds Pounds 80bn of High-Risk Loans at HBOS


Farrell, Sean, The Independent (London, England)


Surge in bad debts drives Pounds 10.8bn annual loss at HBOS Shares plunge on absence of toxic asset insurance deal

LLOYDS BANKING Group revealed yesterday that it had found 80bn of high-risk loans at HBOS, the bank it bought last month to save it from collapse.

The high-risk assets are part of 165bn of loans that Lloyds said were outside its own appetite for risk. Surging bad debts on HBOSs books drove it to a 10.8bn loss for 2008.

Impairment losses at HBOS surged to 9.9bn from 2.01bn a year earlier, with two-thirds coming from the corporate bank, with its heavy weighting towards the stricken commercial property and housebuilding sectors.

Alex Potter, a banking analyst at Collins Stewart, said: The scale of the deterioration in the HBOS book has shocked us.

Lloyds said that HBOSs estimate of the losses for 2008 was only a third of Lloyds, which itself turned out to be too low by 1.6bn.

Eric Daniels, Lloyds chief executive, said the banks forecast had not predicted that the economy would shrink by 1.5 per cent in the last quarter of 2008, increasing pressure on borrowers. While we were pretty gloomy, what actually happened is we were not gloomy enough, he added. But he insisted that the losses were not far off Lloyds expectations and were manageable.

Half of the raciest loans are in HBOSs corporate bank, which was run by Peter Cummings, the banker to high-profile entrepreneurs such as Sir Tom Hunter and Sir Philip Green.

In retail banking Lloyds identified 31bn of high-risk buy-to- let, sub-prime and other specialist mortgages. The other 9bn are in international markets, particularly Irelands rapidly shrinking economy.

Lloyds, whose cautious business model allowed it to weather the credit crunch well, has faced criticism for taking on HBOSs risky balance sheet. Mr Daniels said: I appreciate there has been a huge concern about short-term issues [in the] lending portfolio. HBOS is a high-risk bank. It will feel the impact of the economic downturn more.

The surge in bad debts at HBOS highlighted the need for Lloyds to take part in the Governments asset protection scheme, which insures banks against future losses. The bank was aiming to announce the terms of its participation yesterday but was unable to strike a deal in time.

Sir Victor Blank, Lloyds chairman, said talks were going well and that Lloyds hoped to make an announcement soon, adding that the scheme was sensible.

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