Lloyds ups coverage for impaired loans

MORE THAN a fifth of €8 billion in mortgages at the former Bank of Scotland (Ireland) have soured or will not be repaid in full, the owner of the troubled loan portfolio, UK bank Lloyds, has said.

The bank, however, reported a slowdown in the rate of loans turning bad within its €29 billion Irish loan portfolio during the first three months of the year.

Reporting results for the first quarter of the year, the bank took an impairment charge of £526 million (€644 million). This was down 26 per cent from £711 million in the previous quarter and 54 per cent lower than the £1.14 billion charge in the first quarter of last year.

The charge on Irish loans represented almost a third of the bank’s overall impairment charge of £1.6 billion, though the Irish loans represent just 5 per cent of overall loans at the bank.

The overall impairment charge at Lloyds, which is 40 per cent owned by the British government, for the three-month period was down from £2.4 billion in the final quarter of last year and £2.6 billion for the first quarter of last year.

Lloyds said the rate of increase in newly impaired loans in the £24 billion Irish portfolio had reduced and that 66.6 per cent of the loan was impaired, roughly the same level reported at the end of last year. The bank has, however, increased how much it has provided for to cover impaired loans, from 62 per cent in December to 65 per cent in March.

“Impairment coverage has increased in Ireland, primarily reflecting further falls in the commercial real estate market, and further vulnerability exists,” the UK bank said.

Some 85 per cent of the bank’s Irish wholesale loan portfolio was impaired and 64.7 per cent of the soured loans was covered by provisions. The bank has covered 70 per cent of the impaired mortgages with bad debt provisions.

The slowing rate of loan impairments was “a welcome development”, Goodbody Stockbrokers analysts Eamonn Hughes and Colm Foley said in a research note, adding that UK-owned Irish banks had significantly higher impairments than the domestic banks.

“Slowing momentum in the rate of impairments will be a key variable in giving the market more comfort on ultimate losses at the banks,” they said.

Lloyds announced the closure of Bank of Scotland (Ireland) in 2010 and plans to leave the Irish market and hand back its Irish banking licence. The bank hired Certus, an independent company led by former Bank of Scotland (Ireland) managers, to run down the Irish loans.

Overall, the UK bank made a profit of £288 million for the three months, down from £316 million for the previous quarter and from £3.5 billion for the same period last year. The group said it would shrink assets further and faster than forecast, as Britains biggest mortgage lender reduces its reliance on short-term funding.

Lloyds raised its asset-reduction plan for the year by £5 billion to at least £30 billion and expects to meet its 2014 target a year early, the bank said. Chief executive Antonio Horta-Osorio is seeking to strengthen Lloyds by selling assets, cutting costs and boosting its capital strength. – Additional reporting: agencies