From the Lloyds Banking Group 2009 annual results statement.
J Eric Daniels, chief executive:
Impairments in the year were £24.0 billion, which is reflective of the problem HBOS portfolios, in particular, their over concentration in commercial real estate. When we released our half-year Results, we said that total Group impairments would peak in that half, and the full-year numbers confirm that guidance.
Well, that’s one way of looking at it. Another is to consider the fact that bad debts at Lloyds actually rose in the fourth quarter.
Yes, the Q4 impairment was £5.4bn, against £5.2bn in Q3, which is both surprising and disappointing given the recent credit improvements at Barclays and RBS.
However, it does not completely call into question Daniel’s guidance for 2010 and 2011. Although it probably needs to be taken with a pinch of salt:
Looking forward, we expect to see a similar pace of half-yearly improvement throughout 2010, with further substantial reductions in 2011, and beyond. We expect reductions in all three customer divisions, although we remain cautious on the Irish portfolios, given the uncertain economic outlook.
That’s because the Q4 impairment increase was driven by one division — Wholesale & International, where impairments rose from £900m to £1.7bn quarter on quarter.
Around 75 per cent of this charge came from Lloyds’ Irish subsidiary, according to Citigroup:
Impairment losses [in the International division] have increased by £3,299 million to £4,007 million. Of the total impairment losses £2,949 million arose in Ireland which experienced a significant deterioration in asset values driven by the collapse in liquidity and severe decline in the property sector which saw commercial real estate values fall by over 50 per cent and house prices by over 25 per cent from their peak.
A further £849 million of the total impairment losses arose in Australia driven by concentrations in property and in other sectors such as media, printing and transport which have been hardest hit by the downturn. Business Support Units have been established in both Ireland and Australia, supplemented by a divisional sanctioning process, to provide independent divisional oversight and control of the portfolios.
But Lloyds reckons bad debts in Ireland have now peaked and as the table below shows, impairments elsewhere in the group continued to improve:
Nevertheless, it does seems that the surprise rise in bad debts is behind the decline in Lloyds share price this morning:
However, housebroker Citigroup reckons the market will eventually focus on the positives in the statement: guidance of margins, the size of the fair value unwind and funding and liquidity.
Indeed, Lloyds has attempted to allay fears about the impact of higher funding costs, when the government withdraws its various liquidity support programmes, on margins:
At 31 December 2009, the Group’s overall funding support from Governmental and Central Bank sources totalled £157 billion, with a significant proportion (predominantly Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS) funding) maturing over the course of the next two years. The Group’s balance sheet reduction plans will avoid the necessity to refinance much of this funding.
The current cost to the Group of participating in these schemes is currently approximately 50 basis points over LIBOR for the SLS and approximately 130 basis points over LIBOR for CGS. Overall, based on expected spreads and balance sheet mix, we believe the increased cost of wholesale funding over the next few years is expected to negatively impact the Group’s net interest margin by less than 10 basis points, and this cost is expected to be more than offset by the impact of improved product pricing.
That’s right, just 10 basis points.
Now that will give the bears something to think about.
Related link:
Lloyds losses narrow to £6.3bn – FT
BarCap’s funding findings – FT Alphaville
Lloyds needs to sell Scottish Widows - FT Alphaville