Surely this can’t be right, the share price of a UK bank going down?
Well it is and the reason is not hard to find – in Thursday’s surprise first quarter trading statement Lloyds reveals that corporate impairments in 2009 are going 50 per cent higher than in 2008. That means a hit of around £13.2bn, according to Cazenove.
Unsurprisingly the deterioration is primarily in the HBOS commercial real estate portfolio, most of which is going to be put into the government’s Asset Protection Scheme. However, there is a cost to this scheme which the market seems to have forgotten about. (Remember, shares in Lloyds have risen 180 per cent in the past two months).
According to the terms of the APS, for which Lloyds has already paid a hefty participation fee, there is a first loss tranche equal to 10 per cent of the assets insured. Thereafter the losses are spilt 90/10 between the government and Lloyds.
Given that Lloyds expects to dump £250bn of assets into the scheme as the above table from HSBC shows, it seems unlikely that the APS is going to provide any benefit this year. In fact, Lloyds is going to have to take the £13bn hit on its own.
In other words shareholders, and that includes UK taxpayers, are going to have to take plenty of pain before they can shelter under the scheme’s umbrella.
Related link:
An impaired Lloyds – FT Alphaville