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Lloyds Bank Has Largest Exposure to Risky Loans

Sharlene Goff and Norma Cohen, Financial Times

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.

By contrast, up to 12 percent of loans provided by Royal 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 percent deposit was roughly twice as likely to fall into arrears as one putting down 30 to 40 percent.

In total, 60 percent 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 percent for RBS, 33 percent for Santander, and just 6 percent for HSBC.

About 13 percent of Lloyds’ £340 billion mortgage book – £45 billion 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 percent. 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 percent 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.