Lloyds has largest exposure to risky loans

By Sharlene Goff and Norma Cohen

Lloyds Banking Group’s exposure to the riskiest kind of mortgages is more than double that of any of its top five rivals in what is potentially a ticking time bomb for Britain’s largest high-street lender.

Data published last week by the Bank of England showed that loans representing more than a quarter of Lloyds’ mortgage book are worth at least 90 per cent of the property value they are secured against.

More

ON THIS STORY

• Lloyds chief to set out blueprint for turnround
• On London Sliding homes market to test Lloyds
• In depth UK banks
• In depth UK house prices

By contrast, up to 12 per cent of loans provided byRoyal Bank of Scotland and Santander have a similarly high loan to value, while Nationwide, Barclays and HSBC have a smaller proportion of such risky loans.

The danger of these kinds of loans is that home buyers who make insignificant deposits are considered more likely to fall into arrears. High loan-to-value ratios also pose the risk of bigger losses if borrowers default.

Previous analysis from Standard & Poor’s, the credit rating agency, found that a borrower with a 10 per cent deposit was roughly twice as likely to fall into arrears as one putting down 30 to 40 per cent.

In total, 60 per cent of Lloyds’ secured debt book – which includes mortgages to individuals and businesses – has a loan to value deemed high or very high by the Bank of England, compared with 38 per cent for RBS, 33 per cent for Santander, and just 6 per cent for HSBC.

About 13 per cent of Lloyds’ £340bn mortgage book – £45bn of loans – exceed the value of the property they are secured upon. The actual number of borrowers in negative equity, where their property is worth less than their loan, is much smaller, at about 5 per cent. The figures show how vulnerable Lloyds is to a further souring of the UK economy, particularly another fall in house prices.

They also illustrate the challenges faced by António Horta-Osório, the new chief executive, who will present his initial strategic review to investors this week. Analysts said the concern was that a riskier loan book would push up funding costs for the bank just as it is attempting to boost returns.

“This increases the worry about the quality of Lloyds’ assets and the potential of loan losses to come,” said Ronit Ghose, an analyst at Citigroup.

Lloyds emphasised that negative equity only became a real concern for borrowers if they needed to move house and said it had a range of mortgage products to assist these customers.

It expected the loan-to-value position to be stable, although it forecasts a 2 per cent fall in house prices this year, as it believes they will rise by the same amount in 2012.

Analysts estimate that as much as three-quarters of Lloyds’ risky mortgage book was inherited from HBOS, which was one of the most aggressive lenders during the property boom.

Overheating China – reaction

Posted by Neil Hume on Mar 11 10:40. 1 comment.

A bit more on the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later.

Barclays Capital:
In view of the higher-than-expected inflation in February, More…

A bit more on the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later.

Barclays Capital:

In view of the higher-than-expected inflation in February, we revise upward our projection of average CPI inflation for 2010 to 3.5% from 3.0%, which implies a rise in the headline rate to around 3.5% by mid-2010 and 4% by Q4. This is compared with the government target of 3% announced at the NPC meeting.

Consequently, we revise our call on the benchmark interest rate and now look for a hike in Q2; previously we expected rated to begin rising in Q3. We now project three increases of 27bp in the benchmark rates in 2010 – one in Q2 and the remaining two in H2. We maintain our projection of real GDP growth of 9.6%, but change from upside to balanced risks around the baseline, owing to the quickened pace of tightening

Morgan Stanley:

We continue to see multiple RRR hikes as necessary over the next few months to sterilize the liquidity impact from the BoP surplus, with the next RRR hike likely to be in the very imminent future. The first interest rate hike of 27 bps could come as early as April, in our view, followed by two more hikes in 3Q and 4Q. Nevertheless we stand by our call that Renminbi appreciation (against US$) will not resume until 2H10, although appreciation on a trade-weighted basis is already taking place given the US dollar’s recent and projected strength against other major currencies in the course of this year.

And finally, Goldman Sachs:

Although inflationary pressures remain moderate for now, we believe if there are no measures more decisive than the modest (although relatively frequent) RRR hikes, we are likely to see higher inflationary pressures. Recent comments by a number of policymakers that there are no signs of inflation yet are worrisome as it indicates a lack of willingness to take more decisive measures until higher inflation actually occurs.

Having said that, we still believe policymakers will take a combination of tightening measures in the coming months to prevent overheating. These measures are likely to be targeted at FAI-related areas given the government’s strong emphasis on stimulating private consumption and the unwillingness to fully utilize the exchange rate as a policy tool to influence exports growth. We expect these so called macro tightening measures to include a mixture of credit controls, further RRR and interest rate hikes, administrative controls on investment approvals and funding and other “industrial policies” to curb investment activities in sectors regarded as having problems such as overcapacity.

Melody's note, Comment from RBS (but its estimate for CPI, PPI n bank loan are all way wrong):

More concern about growth: property-sector FAI and export growth in 2H10
Returning to centre-stage, in our view, is the need to cement growth in 2010. While policy makers prefer stable to steadily rising property prices, these have seen nothing but extreme volatility. Combined with possible uncertainty about export growth in 2H10 and the close of the politically sensitive NPC session, we may have several months of relatively benign良性的 regulation of property, which may help property FAI. The risk is that if property prices start rising again, it may lead to greater social tension and more regulatory actions just as the supply of residential property increases in 2H10F.

A slight reversal of the exit/normalisation trade for several months?
We see 2010 as a year of ‘touching the stones to cross the river’ for policies in China, with the government reducing excess liquidity as the real economy improves. The implication is negative for asset plays and positive for transportation and industrials. Ranked by top-down incremental yoy growth, we prefer export-exposed sectors to consumption and FAI-related sectors. That said, in the coming months, we may see a slight reversal of the policy exit/normalisation trade. We believe the sectors that will benefit incrementally are property, energy, materials, cement and consumer discretionary. Defensives and agriculture inflation hedge may perform less well on postponed policy exit and reduced inflationary fear. The impact on banks should be positive on low valuations and reduced tightening fears.

Over to you, Chinese policy-makers.

Related links:
Roach: Pooh-pooh to Chinese bubbles - FT Alphaville
Chinese liquidity – and stocks – go BOOM! - FT Alphaville