Bad loans by Irish subsidiary impede recovery at Lloyds

UK BANK Lloyds has reported that nine out of every 10 commercial property and development loans made by its Irish subsidiary, formerly Bank of Scotland (Ireland), had soured by the end of June.

The Irish bank, which aggressively grew its share of property lending during the boom years under chief executive Mark Duffy, has impaired loans of £10.8 billion (€12 billion) out of a commercial property portfolio of £11.9 billion.

Provisions of £5.9 billion have been taken for bad debts against the loans, which account for the largest write-down in the book.

Lloyds said that Irish bad loans increased to £1.8 billion in the first half of the year, a 14 per cent rise on the same period last year.

Some 64 per cent, or £17.7 billion, of the bank’s total Irish loan book of £27.6 billion is impaired and the bank has taken provisions of £9.9 billion. Lloyds has injected about €8 billion into its Irish subsidiary to cover these losses.

Mr Duffy declined to comment on the losses at the bank he ran.

Bad loans in Ireland accounted for a third of the impairment charge at Lloyds’s overall operations in the first half of the year.

Despite the increased losses in Ireland, the UK group’s overall impairment charge fell 17 per cent to £5.4 billion on last year.

A further 11 per cent of Irish loans became impaired during the first six months.

The higher impairment charge arose from “actual and anticipated further falls” in the commercial property values.

“We believe that further vulnerability exists,” the bank said.

The Irish impairment charge decreased by £928 million compared with the second half of last year, amounting to 13.2 per cent of loans – up from 11.1 per cent for the same period last year but down from 20 per cent for the second half of last year.

The bank said the impairment charge on its Irish loans was £500 million worse than expected at the start of the year as a result of falling property values.

“The fragility of the economy and political system could still cause further credit quality deterioration within our book as it winds down,” the bank said. Almost 16 per cent of the Irish bank’s £7.9 billion retail loans, 96 per cent of which are mortgages, was impaired at the end of June.

The bank has written off 11 per cent of this portfolio. The impairment charge on the mortgages rose 44 per cent in a year due to falling property prices and higher arrears, including “customers on a forbearance arrangement”.

Lloyds said the level of redemptions and recoveries was low due to “a severe lack of liquidity” in the Irish mortgage lending market.

The UK bank is winding down the Irish unit which has relinquished its banking licence and is being run down by former management through a firm called Certus.

Lloyds said the wind-down was managed by a UK-based team.

Lloyds, which is 41 per cent owned state-owned, reported a £3.25 billion first-half loss on the back of higher bad loans in Ireland and the cost of compensating customers mis-sold insurance.