Lloyds to writeoff £13bn!

Heyman_2

Generali wrote: »

The Lloydsetc balance sheet for 2008 shows:

Assets: £436,033,000,000
Liabilities: £426,334,000,000

Thus they have equity of £9,699,000,000

If they're writing down £13,000,000,000 of asset value they need to increase their assets to remain solvent (negative equity is insolvency as well as an inability to pay the bills).

Or reduce their Liabilities presumably, if they haven't done so already?

Heyman_2

Generali wrote: »

What you're saying is correct - demand for Gilts is holding up right now. The problem isn't borrowing a lot for a short period, it's the apparent assumption by the Government that they can continue to borrow money at very low rates pretty much indefinitely.

If rates rise then there will be all sorts of nasty effects that people haven't really been talking about. One of those is that Gilt values will fall and so bank reserves will take another huge battering.

I guess it depends to what extent rates rise and over what period. It depends whether the BofE are proactive or reactive to those potential scenarios ahead of us that start looking inevitable. Their record in that department isn't brilliant unfortunately :rolleyes:

The potential domino effect is a bit frightening - if bank finances take another pounding, they'll be looking to shore up their Balance sheets again by increasing their margins and therefore the cost of lending. If they do that in a climate of increasing BofE IRs and reduced public spending then we could really be in trouble.

But it's all if, if, if - I guess another (and perhaps more constructive) take on it would be how could that situation be avoided, given the current situation we find ourselves in?

Generali

Heyman wrote: »

Or reduce their Liabilities presumably, if they haven't done so already?

Unfortunately that won't work. The trouble is the most obvious way for a bank to reduce it's liabilities quickly is to give savers their money back. That reduces their assets (in the form of cash) on a £ for £ basis and quickly causes far bigger problems as Nothern Rock found out when their liability base decided they wanted to take their liability elsewhere!

In a free market situation, the best way to resolve the situation would be to sell an asset (like Barclays selling of a subsidiary). In the crazy world of state-supported banking anything can happen although it always seems to end up with the taxpayer paying the bill.

Heyman wrote: »

I guess it depends to what extent rates rise and over what period. It depends whether the BofE are proactive or reactive to those potential scenarios ahead of us that start looking inevitable. Their record in that department isn't brilliant unfortunately :rolleyes:

The potential domino effect is a bit frightening - if bank finances take another pounding, they'll be looking to shore up their Balance sheets again by increasing their margins and therefore the cost of lending. If they do that in a climate of increasing BofE IRs and reduced public spending then we could really be in trouble.

But it's all if, if, if - I guess another (and perhaps more constructive) take on it would be how could that situation be avoided, given the current situation we find ourselves in?

As you say, it's all ifs. That's what makes predicting these things fun!

1echidna

What sort of effect would a further sharp fall in house prices have? Aren't a lot of their assets in mortgage loans?

Masomnia

Wouldn't QE have potentially meant assets being purchased from Lloyds by the BoE? I wonder what effect that might have had on the balance sheets, not sure how all that might be accounted for.

Presumably they've sold some mortgages in that period, albeit not many, so I assume assets would have risen there. As we saw in another thread £8billion has been paid on mortgages in some recent timeframe as people take advantage of lower rates, that must be positive for them; same goes for savings as high interest, fixed rate deposits mature to be replaced by lower rate ones, better for cash flow even if the assets/liabilities side of things doesn't change.

I guess it comes down to how much previous debt has been written off, particularly where Halifax is concerned. If all the loss making debt is out of the way, does that mean that the remainder is a load of current account customers from whom the bank rakes it in through charges, and fees?

So many variables! This is quite fun....

Generali

1echidna wrote: »

What sort of effect would a further sharp fall in house prices have? Aren't a lot of their assets in mortgage loans?

If house prices fall, the value of the mortgage on their books should fall as it has become riskier.

Masomnia wrote: »

Wouldn't QE have potentially meant assets being purchased from Lloyds by the BoE? I wonder what effect that might have had on the balance sheets, not sure how all that might be accounted for.

Presumably they've sold some mortgages in that period, albeit not many, so I assume assets would have risen there. As we saw in another thread £8billion has been paid on mortgages in some recent timeframe as people take advantage of lower rates, that must be positive for them; same goes for savings as high interest, fixed rate deposits mature to be replaced by lower rate ones, better for cash flow even if the assets/liabilities side of things doesn't change.

I guess it comes down to how much previous debt has been written off, particularly where Halifax is concerned. If all the loss making debt is out of the way, does that mean that the remainder is a load of current account customers from whom the bank rakes it in through charges, and fees?

So many variables! This is quite fun....

If the bank sells a mortgage, its assets rise as the mortgage is booked as an asset but also fall as they have to come up with cash to pay the seller of the house or the previous holder of the mortgage. As a mortgage is unlikely to be held at 100% of the cash value on the books, selling a mortgage will most likely reduce the value of assets in the short term before boosting them in the longer term as the cash flows in to repay the mortgage.

By reducing the number of new loans made and screwing their existing customers as much as they can, banks are able to rebuild their balance sheets. It's why HSBC (as a bank not in any particular trouble AFAIK) went to the markets to get more cash - they felt they could increase their market share while other banks were rebuilding.

Andrew64

Anyone think this news may be connected in some way?

Halifax set to close retail division here after order by UK Treasury

http://www.independent.ie/business/irish/halifax-set-to-close-retail-division-here-after-order-by--uk-treasury-1818866.html

"THE Halifax Bank in Ireland is set to close its retail division following an instruction from the UK Treasury to repatriate assets back to the UK. The 'Sunday Tribune' reported that Bank of Scotland Ireland is preparing to shut the Halifax starting in September following an instruction from the UK Treasury to cease lending here and repatriate £20bn of the £35bn in Irish assets. It said the move was the culmination of an extensive review, dubbed 'Project Primrose', which started after the bank was forced into a merger with Lloyds TSB, in which the UK government now owns 43pc"

julieq

Thrugelmir wrote: »

Because most of the £400 billion is owed to depositors.

The only part of this which belongs to Lloyds is primarily share capital plus retained profits.

By writing down £20 biliion or whatever. Lloyds will ultimately have to generate cash for the losses which crystalise.

By raising the SVR , Lloyds will generate additional profit which will turn into cash which will strengthen its capital position. A slow process but most likely the way forward.

Lloyds may not be raising its SVR at the moment as its plan is to control around 30% of the UK mortgage market. So is in a position to attract quality mortgage business. Once this objective is achieved it can afford to raise rates whilst remaing highly competitive.

That's what competition is about. They won't raise SVR above what the competitive landscape allows and if they did it wouldn't raise money anyway. It's about elasticity of demand, not being able to move a slider up indefinitely to make more money, if that slider existed it'd already be set to maximum.

As regards the assets, you're missing the point, which was that the writedown is a small percentage of even the Lloyds assets on their 2008 balance sheet, i.e. it's bad news but not cataclysmic news, it's a marginal devaluation of the overal assets - if the whole £200billion odd of toxic debt had gone bad it would have been cataclysmic but that isn't what is being declared. You have also to add in the assets of HBOS which I think were something around £600billion with a nominally positive equity situation at the point of merger, the "insolvency" coming from the expectation of bad debt.

Given that the percentage of so called "toxic" debt was 80/20 in favour of HBOS, this is a writedown of the HBOS asset position principally, which is not unexpected given the HBOS situation. As I said yesterday, this is a process of crystallising expected losses against the known "toxic" assets, of which a percentange will be good and a percentage bad.

What I'm complaining about mostly is the use of unreferenced big numbers to imply disaster, where there is no disaster. It's like interest rates "soaring", repossessions "surging" and so on, it's about over hyping stories for sensation.

And of course we're not seeing carnage in the ftse this morning, or anything like it. The Lloyds writedown isn't even close to being big news anywhere.

There are big bad news stories in this recession, and there certainly are nasty surprises to come. Overegging the stories that aren't big is essentially crying wolf, it's not helpful to anyone.

mbga9pgf

Julie, you are being obstreperous and not answering my direct point. Lloyds simply cannot take ANY loss without having to come up from the cash, from further bank rights issues, government bailouts or profits, otherwise they do not meet minimum capital adequacy requirements and are required by international agreements to cease trading.

if the whole £200billion odd of toxic debt had gone bad it would have been cataclysmic but that isn't what is being declared.

Yet. You are forgetting ,we are in a lull of toxic asset writedown, the big surges will happen later this year through to late 2011, early 2012.

You CANNOT have funding for 80% of your liabilites and continue to trade. They may have a sound business model today, but thats kind of a moot point when they made 200 billion in bad decisions during the boom years... with a net profit of a paltry 4 billion in 2007, those figures just dont stack up.

There are plenty of Lloyds shareholders cacking themselves this morning, check out the forum over at www.iii.co.uk

As for ftse losses, we are in another lull. Until later on this week, when the big US banks announce their trading statements, we wont have any firm direction in trading. I have to be completely honest here - I am not hopeful for their statements. They may get a bounce back off results being "less bad than expected" plus some phony spin of how the end is in sight for the credit crunch, but I beilieve this week is going to be somewhat of a shocker. I have figures for where I expect writedowns to be (back of fag packet stuff) and in all honesty, they aint pretty. Sad news is, it will get worse from here on in for the next 18-24 months, purely down to credit crunch, without looking at figures as a result of the knock on effects to the american economy.

nicko33

so where does the governments Asset Protection Scheme come in all this?

"The Asset Protection Scheme is designed to protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets."