Lloyds asset protection scheme talks stall as HBOS losses confirmed

Lloyds Banking Group, which today confirmed that Halifax Bank of Scotland (HBOS) lost £10.8 billion in 2008, remains locked in talks with the UK government about participation in its asset protection scheme.

Lloyds had been widely expected to confirm the terms of its participation this morning, but a statement by the bank said only that discussions with the UK Treasury were in progress. "Whilst there can be no certainty about the outcome, the Group will provide a further market update in due course," the bank said.

Lloyds today announced its 2008 results, revealing the full extent of the losses incurred by HBOS, which it acquired in January. The largest component of the £10.8 billion loss came from the corporate division, which lost £6.8 billion through bad lending decisions. "A significant deterioration in corporate credit conditions, particularly in the second half of 2008, led to very substantial impairment losses, primarily as a result of exposure to property-related sectors," the bank said. Pre-tax profits at Lloyds TSB, excluding HBOS, fell by 80% in 2008 to £807 million.

Analysts suggest the problems in the HBOS corporate lending book may signal a new wave of writedowns, as bank balance sheets are damaged by companies struggling to meet loan repayments under the impact of recession.

"Having gone through the writedowns in structured products that most large banks had, the next wave of writedowns will certainly come from the loan books as we move into recession," said Elisabeth Rudman, a senior credit officer at Moody's Investors Service in London. "HBOS has reported losses in this area earlier than other players - that's probably a reflection of the fact that they had been quite aggressive in their lending style."

Despite the losses, Lloyds group chief executive Eric Daniels defended the acquisition of HBOS. "We are buying the business in the down part of the economic cycle, at a significant discount to book value, which increases the likelihood of value creation," he said. But he warned that 2009 would be another challenging year, with further losses still expected. "Impairments will continue to run at high levels, especially in the higher risk parts of the legacy HBOS portfolios," he said.

If Lloyds does broker a deal with the Treasury to admit its toxic assets to the asset protection scheme, it will have to make legally binding commitments to lend a certain amount over the course of the year. Royal Bank of Scotland (RBS) yesterday put £302 billion of toxic assets into the scheme on the condition that it lend £25 billion to homeowners and businesses in 2009.

"If implemented in the right way, the asset protection scheme could potentially prevent Lloyds Banking Group from being dragged down over a long period of time by some of the more troubled assets belonging to HBOS," said Rudman.

See also: RBS signs up to UK's asset-protection scheme
Lloyds' HBOS losses highlight flaws in FSA capital measures
Crosby resigns from FSA following HBOS allegations