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5 Years : From May 2011 to May 2016
By Max Colchester
LONDON--Lloyds Banking Group PLC (LYG) Monday said it sold off GBP1.5 billion of Irish commercial real estate loans for around 10% of their value, a reminder of the huge cost involved for banks unwinding soured loans in the country.
The bank, which is 40% owned by the British government, said it had agreed to sell GBP1.5 billion of "particularly distressed" loans for GBP149 million to Risali Ltd., an entity affiliated with investment manager Apollo Global Management LLC. The deal is likely to be completed in the first quarter of 2013, Lloyds said.
As of June 30, Lloyds had put aside GBP6.2 billion to cover write-offs on its GBP10 billion book of Irish commercial real estate loans. On Monday, the bank said that the sale of the GBP1.5 billion of loans wouldn't have an impact on the lender's balance sheet as there is a significant provision held against the loan portfolio.
Analysts said the loss was planned for. "Investors should not be unduly alarmed by the scale of discount given the level of provisions already held, and it represents a further small step towards exiting Ireland," Ian Gordon, a banking analyst at Investec, wrote in a note.
Before the 2008 crisis, HBOS and Royal Bank of Scotland Group PLC (RBS) piled into Ireland's commercial real estate market. The decision proved costly for both lenders.
Lloyds merged with a crippled HBOS during the height of the crisis, and took on the responsibility of grinding down its giant Irish loan book and exiting the country. Both banks have sold on loans at steep discounts.
While Lloyds has taken the decision to get out of Ireland, RBS continues to have a presence in the country. It has GBP44.8 billion of gross loans against which GBP10.1 billion provisions are held. Troubled Irish real estate loans will continue to weigh in RBS' "bad bank" for years to come. Executives estimate that even after the bank's five-year turnaround plan is complete, a rump of around GBP40 billion in assets--a large chunk of which are in Ireland--will have to slowly burn off over many years.
RBS has taken some unusual steps to deal with its Irish assets.
For instance, it recently put about GBP1.4 billion of property assets, including nursing homes and shopping centers, into a fund run by buyout firm Blackstone Group LP. Many of these assets actually remain on the bank's books. RBS is simply paying Blackstone to manage the assets, with the goal of eventually finding buyers.
The outlook on Irish banks, meanwhile, remains clouded. The Irish central bank Monday said it reprimanded and fined Ulster Bank Ltd., a unit of RBS, 1.9 million euros ($2.4 million) for failing to apply haircuts, or discounts, correctly to some deposits and therefore mis-reporting its level of capital holdings.
Also Monday, Fitch Ratings upgraded Irish banks to a stable rating, but mainly because the agency believes that the banks would be bailed out by parent companies or the government if they ran into trouble.
-Write to Max Colchester at firstname.lastname@example.org
(Eamon Quinn contributed to this article.)