Majority of Lloyds’ Irish loans impaired

Lloyds Banking Group, Britain’s biggest mortgage lender, says two thirds of its €24.8bn of loans in Ireland are unlikely to be repaid in full following the property crash.

About £16.4bn (€19.7bn) of loans to Irish borrowers were impaired at the end of last year, the London-based Lloyds said yesterday. That is up from 53% at the end of 2010.

Lloyds, which reported a wider-than-estimated loss of £2.8bn (€3.4bn) for 2011, shut its Irish unit in 2010 as losses soared. It is running down its remaining assets. The worst sector was commercial property, where 90% of the bank’s £10.9bn of loans were impaired at the end of 2011.

“This is by far the most troubled Irish loan book that we have seen so far” among universal lenders, said Karl Goggin, an analyst at NCB Stockbrokers.

“The level of provisioning suggests they are kitchen-sinking the loan book as Lloyds looks to exit Ireland as quickly as possible.”

Irish commercial property prices have slumped 65% since 2007 and home prices have almost halved in the period. Lloyds losses can be traced to Bank of Scotland’s entry into the Irish mortgage market in 1999, followed two years later by its purchase of State-owned lender ICC. The bank offered “substantially lower rates than domestic banks at the time”, according to a a report commissioned by the Government in April.

New provisions for bad loans in Ireland fell by 25% last year to £3.19bn, Lloyds said. In all, the lender has set aside £10.2bn to cover loan losses, equivalent to 62% of impaired loans. That is up from 54% at the end of 2010 because of further declines in the commercial property market during 2011, Lloyds said.

By comparison, Bank of Ireland said about 17% of its Irish loans were impaired at the end of last year, according to Colm Foley, an analyst at Goodbody Stockbrokers. That excluded about €10bn of property loans the lender sold to Nama in the past two years at an average loss of 44%.

Anglo Irish Bank, nationalised in 2009, was forced to take a 62% loss on €34bn of loans it sold to NAMA. The lender, since renamed Irish Bank Resolution Corp, said in August that 54.5% of its remaining €24.9bn of loans were impaired at the end of June.

“Lloyds appears to be the most aggressive institution in crystallising impairments” in Ireland, Mr Foley said in a note.

“Whether this is a strategy or a reflection of the quality of the loan portfolio is unclear.”

Lloyds and fellow British lender Royal Bank of Scotland, which bought Ulster Bank in 2000, “competed aggressively” with local banks and introduced products that “posed new risks for both the borrower and the lender”, the report said in April.

Lloyds, which received a £20bn UK government bailout in 2008, has transferred management of its Irish holdings to Certus, a company set up by the bank’s former Irish management.

Lloyds injected about €8bn of capital into its Irish unit between late 2008 the end of 2010, when it subsumed loans made in Ireland into the parent company.

RBS, which is Britain’s biggest government-owned lender, has pumped as much as £10bn into its Irish unit since 2008 to absorb losses from the property bubble, a spokesman for the Edinburgh-based lender said.

“The most money that RBS lost, the least wise decisions were property lending in the UK and Ireland, of which Ireland was the worst of all,” said CEO Stephen Hester, adding that RBS had pumped “too much” money into the unit.

Lloyds’s approach to Ireland was “a positive development and suggests that Lloyds is ahead of other banks in recognising losses, even though Ireland’s state-guaranteed banks have been recapitalised to cope with pretty severe losses,” said Mr Goggin.