Writing off ‘bad’ loans costs Lloyds heavily

THE monetary impact of writing off so-called “bad” loans – or those which are unlikely to be repaid – including a significant amount in its Irish operations, led Lloyds Banking Group into posting heavy losses for the first half of this year.

Lloyds yesterday reported a first-half net loss of just under £4 billion (€4.72bn); considerably down from a profit of £2.8bn for the corresponding period last year. In a rather obvious summing up of the causes, group chief executive, Eric Daniels said: “Our first-half loss was driven by the high levels of impairment.”

Over the course of the first six months of this year, Lloyds’ impairment charges – basically, the monetary cost to the business of writing-off loans which are unlikely to be repaid – went from £2.5bn to £13.4bn.

Much of this has to do with the £12.2bn acquisition, last September, by Lloyds (which is currently 43% owned by the British Government) of the Halifax Bank of Scotland Group (HBoS); which incorporates the Bank of Scotland (Ireland) business banking division and Halifax Ireland retail banking arm here.

According to the Lloyds Group, 80% of the impairment charge increase was down to the HBoS business – with the fall in property prices in Britain and Ireland having a more significant effect than previously, due to the large amount of property-related loans doled out by HBoS.

For its part, HBoS yesterday reported a first-half loss of £11.52bn; down from a first-half profit of £1.08bn last year.

Of note to Ireland, Lloyds said the combined impairment charges from its new Irish operations amounted to £1bn (€1.18bn) in the first six months of the year.

The group was remaining tight-lipped yesterday over the future size and profile of its business in Ireland; saying only that there remained ongoing concerns about the outlook for the Irish economy.

Speculation over the future of the Irish operations has been rife for some time, with a strategic review ongoing. A possible closure of the retail banking arm, Halifax, here has been mooted; but a spokesperson for the Lloyds group refused to comment yesterday.

“Impairment losses in Ireland of £1,027m represent 3.4% of average advances increasing from 1.8% in the second half of 2008. With limited new business being written and very low levels of roll-off driven by a lack of liquidity in the commercial property market, overall exposures remain almost static. The severe economic downturn has significantly influenced performance with a depressed property development sector being impacted by a year-on-year house price fall of 10.9% and unemployment levels of 11.9%,” Lloyds said of the Irish market in its half-year report yesterday.

However, on an overall group basis, it expects that impairment charge levels – on both retail and corporate loans – should have reached their peak at the halfway point of this year.