Bank seeks to cut exposure to low-margin social housing debt and is likely to take a hit on any disposals, despite renewed interest in sector
Lloyds is understood to be exploring ways of cutting its £14bn UK social housing book. This could involve the potential sale of a £3bn portfolio of loans it made to the sector, which are now expensive to hold compared with the cost of capital that must be retained against them under Basel III banking rules.
At least one other bank has been approached by Lloyds, which has “by far the largest commitment to the social housing sector of any UK bank”, according to a Lloyds spokesman. “We continue to focus on the day-to-day activity of supporting our customers,” he added. The group already had significant exposure to social housing when it inherited HBOS’s legacy loans in 2008, itself a major lender to the market. With a combined portfolio in the region of £14bn, the takeover could also mean Lloyds has a large exposure to some individual customers.
A potential buyer could come in the shape of a bank that does not already lend to the sector and is looking to expand into this field, although any deal will “come down to price”, said a housing finance specialist at another bank. “The challenge is that the vast majority of [Lloyds’] portfolio is at low historic margins. It is not attractive to acquire unless there is a substantial discount involved.”
Banks including Lloyds made cheap loans to the social housing sector at very low margins of between 30bps and 60bps, which were typically long-dated for periods of 30 years at a time. But they failed to lock in the low cost of funding when the loans were made. This has now shot up, making it less profitable or even uneco-nomic to hold these assets on balance sheets.
Other lenders with large social housing portfolios include Santander, Nationwide, NatWest and BNP Paribas. Margins are now much higher and risks relatively low, sparking renewed interest in the sector from institutions such as UniCredit. Another option for Lloyds is to issue a covered bond or securitisation, through which it could sell its exposure to a pool of investors. Either way, it is likely to take a large hit.
Last year, Lloyds sold its debt exposure to housebuilder Crest Nicholson to US distressed debt fund Varde at a loss. It marked a step towards the bank’s restructuring of the portfolio of loans it took from HBOS. It is also looking to sell a portfolio of around 25 to 30 commercial property loans and has set up a platform through which residential specialist Grainger will asset manage distressed residential property on its behalf.
The part-nationalised bank is undertaking a strategic review aimed at shrinking its balance sheet, under the direction of new chief executive António Horta-Osório. UBS has sold another of the seven European commercial real estate loans in a €400m package that it put on the market last year. German debt specialist Arminius Real Estate has bought back a €50m-plus performing loan, which UBS made to the company in 2005. It had used the debt to buy an office-led portfolio concentrated in Hanover, Germany.