'BoS had shut down by time we stepped in' says Daniels

Published on Wednesday 5 August 2009 21:43

ERIC Daniels, chief executive of Lloyds Banking Group, yesterday delivered his most candid criticism of HBOS by saying it had "shut down" as a lender before its controversial takeover.

Lloyds shares surged during the day as the retail banking giant took a massive hit from the acquisition of HBOS but declared that the worst impact of the recession was behind it.

The banking giant wrote off 13.4 billion in bad debts in the six months to 30 June, leading to a 4bn loss for the period.

About 80 per cent of the impairments stemmed from high-risk loans Lloyds acquired from HBOS when the banks merged in January. Most of the HBOS write-offs came from its corporate lending division, which Lloyds said was too exposed to the property sector and had riskier lending practices than its own.

Edinburgh-based HBOS merged with Lloyds TSB in January, a controversial deal that created Britain's largest retail bank.

In his most outspoken comments about HBOS since the deal was completed, Daniels said HBOS had been too focused on particular sectors, and too involved with a relatively small number of businesses and entrepreneurs.

"It was a highly concentrated portfolio, lots of single-name exposures and too much exposure to property," Daniels said. "It wasn't a balanced portfolio; it clearly didn't perform through the cycle."

Daniels said HBOS had suffered from a lack of liquidity throughout 2008 as wholesale funding markets closed, leading it to slash lending and eventually seek a merger with Lloyds.

The HBOS business pipeline was "absolutely dead" when the merger took place in January, something the bank has taken six months to rebuild.

"The Bank of Scotland had shut down last year," Daniels told The Scotsman.

"They didn't have the liquidity to lend, and clearly we do have enough liquidity, so we rebuilt the pipeline."

Lloyds said it had not discovered any shocks after acquiring HBOS, but that when the economy contracts much more quickly than it had forecast, it caused losses in its highly leveraged portfolio to escalate.

Daniels said that even with hindsight the deal had been right, but it would take years before the benefits could be evaluated.

"We've always been very clear that you don't judge an acquisition after six weeks or six months," he said. "The performance of an acquisition of this nature, which is huge, really will be judged over years, not months."

As well as sharply increased bad debts, Lloyds has identified 300bn in assets – about a third of its balance sheet – which it will wind down or sell because they are considered too risky.

A "substantial majority" of the assets came from assets acquired from HBOS.

Share in Lloyds rose by as much as 15 per cent yesterday as the bank said that after taking a major hit on the HBOS assets it believed the worst bad-debt write-offs were behind it.

While write-offs from its retail banking business are expected to increase as unemployment rises, Lloyds is forecasting that overall impairments will be lower in the second half of the year, and will continue to fall in 2010.

Shares in the group closed up 8.9p or 10.6 per cent at 93.2p.