Lloyds flogs subprime mortgage portfolio for £3bn

The transaction is the latest in a string of attempts by the bank - which is, lest we forget, 39% owned by the taxpayer - to shore up its capital reserves.

by Emma Haslett
Last Updated: 18 Nov 2013

Lloyds has demonstrated just how much things have changed since the sub-prime mortgage crisis of 2007 by flogging a once ‘toxic’ portfolio of residential mortgage-backed securities (essentially bonds backed by mortgages) for a cool £3.3bn.

The move, which Lloyds reckons will net it £540m before tax, is an attempt by the bank to shore up its capital reserves as it attempts to meet Basel III requirements imposed by the European Central Bank, which began to be phased in at the beginning of this year. Lloyds says the sale will add about 33 basis points to its core tier 1 capital ratio, equivalent to about £950m of capital under current rules. Not bad.

Although subprime mortgage bonds were blamed for kicking off the global financial crisis, the portfolio’s buyers – ‘a number of different institutions’ including Goldman Sachs – aren’t being entirely imprudent. Returns on sub-prime mortgage bonds rose by 41% in 2012, and since January they have risen by another 12.7% - so although it’s a risky investment, it’s one worth making if you can afford the gamble. And given the portfolio has a book value of £2.7bn, they must have a certain amount of confidence.  
This is the latest in a string of high-profile selloffs by Lloyds as it attempts to bolster its capital reserves. Yesterday, it agreed to sell its private banking arm – including branches in Zurich, Monaco and Gibraltar – to Swiss asset management group Union Bancaire Privée. Last week, it sold a £450m stake in wealth manager St James’s Place.

Speculation will now centre around the fate of Scottish Widows Investment Partnership – SWIP to its friends – Lloyds’ asset management arm, which could make it another £800m. Although Lloyds is yet to confirm any plans for a sale, bidders are already circling, with rival Threadneedle rumoured to be planning to put in an offer.

In the longer term, this could be the beginning of the end for taxpayers’ relationship with the bank. Last week, the International Monetary Fund called on George Osborne to come up with a strategy to return bailed-out banks to the taxpayer. If Lloyds carries on like this, it might not be quite as much of a slog as he expects.

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