Lloyds hit by €5bn Irish impaired loans

A £4.3 BILLION (€5 billion) hit on impaired Irish loans took the gloss off Lloyds Banking Group’s return to profitability in 2010.

In December the partly-nationalised UK lender warned that any economic recovery in Ireland could take longer than previously anticipated, and this was likely to affect its Irish loan book.

Yesterday, Lloyds confirmed it had taken an impairment charge of £4.3 billion for the full year 2010. This compares to a £2.9 billion charge in 2009.

These problem loans are a legacy of its Bank of Scotland (Ireland) unit, which withdrew from the Irish market last year.

The £4.3 billion charge reflected a material deterioration in the economic environment in Ireland in the last quarter of 2010 which resulted in the EU-IMF financial bailout in late November 2010, it said.

Outgoing group chief executive Eric Daniels said Ireland would remain difficult but he expected bad debts to improve this year. “The Irish economy remains at very low levels. We view them as sort of bouncing along the bottom, not getting worse but certainly not improving. We would expect for 2011 that we’re going to see very modest growth,” he told reporters.

As part of the closure of Bank of Scotland (Ireland) Limited, a dedicated UK-based credit team has been put in place to manage the wind-down of the group’s Irish loan book.

Although Lloyds is running off its Irish exposure, it said current levels of loan redemptions and recoveries were low due to a “severe lack of liquidity”.

Earlier this month it was reported that Bank of Scotland had begun to restructure debts owed by buy-to-let borrowers in Ireland in exceptional circumstances.

Overall the group was back in the black, with profit before tax of £2.2 billion in 2010, £300 million ahead of the average market forecast, having lost £6.3 billion in 2009.

“We achieved a step change in our financial performance despite modest economic growth, returning the group to profitability while absorbing the substantial costs of reducing risk in the business,” Mr Daniels said.

“Their results were good but there are still problems on the fringe, such as their bad debts,” said John Smith, senior fund manager at UK investment firm Brown Shipley. “There is still uncertainty going forward and banks are not the safe investment that they were perceived to be a few years ago.

Lloyds is 41 per cent owned by the UK government after being bailed out during the credit crisis when it was saddled with billions of pounds of losses from its takeover of troubled rival HBOS in 2008, a deal brokered by the Labour government of the time. – (Additional reporting – Reuters)