Lloyds Banking Group continued to reduce its exposure to real estate lending during 2015 with a decrease to its gross direct real estate loan book of almost 10 percent, according to its full-year results.
The bank’s UK direct real estate lending, defined as exposure directly supported by cash flows from property activities, stood at £19.5 billion at the end of the year across its Commercial Banking, Wealth and Run-off divisions. That total was down from £21.6 billion at the end of 2014.
Lloyds said that the portfolio continues to reduce significantly, with the higher-risk run-off element of the book reduced from a gross £3.3 billion to £1.1 billion during the year. The remaining gross lending of £18.4 billion, relatively unchanged from £18.3 billion at the end of 2014, constitutes the lower-risk element in its Commercial Banking and Wealth units, where new loans continue to be written.
The volume of new commercial real estate lending in 2015 was not detailed. However, total loans and advances to customers were £455 billion, down slightly from £456 billion. Loans to property companies stood at £32.2 billion of that total, down from £36.7 billion in the previous year. Personal mortgages counted for £312.9 billion of the total, down from £333.3 billion in 2014.
The overall Commercial Banking segment – within which CRE activity is headed by John Feeney – wrote overall loans and advances to customers of £101.3 billion, up from £100.9 billion in 2014.
Lloyds provided an analysis of its commercial banking UK direct real estate loan-to-value profile, which continued to reduce during the year. At the end of 2015, UK exposures of more than £5 million with an LTV of less than 60 percent stood at just over £5 billion (63.7 percent of the total £7.9 billion), of which only £72 million was impaired. That compares to just over £4 billion (47.8 percent of a then total £8.5 billion) at the end of 2014.
At the high end of the leverage scale, the bank noted £111 million of exposure in the 80-100 percent LTV bracket (1.4 percent of the total), down from £227 million (3.3 percent) in 2014.
“The market for UK real estate has been buoyant and credit quality remains good with minimal impairments/stressed loans,” the bank stated. “All asset classes are attracting investment but, recognising this is a cyclical sector, appropriate caps are in place to control exposure and business propositions continue to be written in line with prudent risk appetite with conservative LTV, strong quality of income and proven management teams.”
In the Run-off division, the Irish non-core commercial real estate exposure has been largely reduced, with the exception of a £37 million residual book, of which £5 million is impaired. Last July, Lloyds sold almost all of the remainder of its non-core Irish CRE loans in the Project Poseidon portfolio sale to Goldman Sachs, CarVal Investors and Bank of Ireland.
The corporate real estate and other corporate portfolio also continued to reduce, with net loans and advances down from £3.036 billion to £1.126 billion.
In the residential sector, mortgage lending increased by 1 per cent, slightly below the market growth of 2.5 per cent.
“We have taken the conscious decision, however, to balance margin considerations with volume growth in the mortgage business, growing our open book by around 1 per cent versus a market that grew by around 2.5 per cent,” said Lloyds group chief executive António Horta-Osório. “We believe this is the right approach as the leader in what is, at the moment, a low growth market where growth is predominantly coming from Buy-to-let.”
The bank said that buy-to-let growth (BTL) was significantly lower than market at 4 percent. Its market share of new BTL lending, at 19 percent, was below its mortgage market share of 21 percent. A low-risk approach to BTL has been applied, with a maximum LTV of 75 percent and maximum customer exposure of £2 million and three BTL properties it said.
Overall, Lloyds made a pre-tax profit of £1.6 billion, slightly down from £1.8 billion and reflecting increased PPI charges. The bank’s impairment charge was down 48 percent to £568 million and its asset quality ratio improved by 9 basis points to 0.14 percent.