Lloyds £540m profit in sale of US mortgage bonds

Antonio HortaOsorio staged sale as US mortgagebacked securities recover some of their value following the subprime crisis. Picture: AFP/Getty

The mortgage-backed securities were acquired for £3.3 billion by a number of institutions, including Goldman Sachs.

Lloyds, 39 per cent owned by the taxpayer, inherited the bonds when it rescued Halifax Bank of Scotland at the height of the financial crisis in 2008 that also triggered its £17bn state bailout.

The bank said yesterday that the transaction would beef up its tier 1 capital ratio by £1.4bn and its core tier 1 capital ratio by £950m.

“This move fits neatly with Lloyds’s determination to exit businesses it doesn’t regard as core and build up its capital reserves in doing so. It makes sense,” one banking analyst said.

Since the group’s taxpayer rescue, it and Royal Bank of Scotland have faced political pressure to ramp up lending to UK households and businesses.

The sale comes amid a growing recovery in the US housing market, with residential prices posting their largest gain in March since the peak of a housing boom in 2006.

Analysts said it marked a turnaround in appetite for US mortgage-backed securities, the controversial products at the heat of so-called “sub-prime lending” that was seen as the main cause of the global banking meltdown.

Banks worldwide were forced to take hefty bad debt losses as they wrote down the values of their US mortgage bond portfolios.

Britain’s banks have also been urged recently by the Bank of England to strengthen their reserves against potential future financial crises, warning of a £25bn “black hole” in their collective balances sheets.

Lloyds has been steadily exiting businesses seen as not part of its core activities by chief executive Antonio Horta-Osorio, while boosting its capital in preparation for an eventual sale of the government’s stake.

The bank said earlier this week that it was selling its lossmaking international private banking arm to Switzerland’s Union Bancaire Privee. The business, which manages assets worth £7.2bn, reported a loss of £50m in 2012. The sale included Lloyds’s Geneva-based Private Bank and branches in Gibraltar, Monaco and Zurich. Lloyds also raised about £500m last week by selling another 15 per cent of its stake in UK wealth manager St James’s Place. The bank sold a total of £6.3bn of non-core assets this year.

Horta-Osorio has said he expects to reduce non-core assets to below £70bn by the end of 2014. As part of the latest deal, Goldman Sachs bought £170m worth of residential mortgage-backed securities for about £200m in cash.

The Lloyds TSB Group Pension Trust also exited its share of the portfolio, bringing the trust a pre-tax gain of £360m and reducing its deficit. The bank said it expected to complete the transaction next week.

Both Lloyds and RBS reassured investors last week that they would not have to tap them for further capital to bolster their balance sheets.

Lloyds declined to comment on reports last night that it was looking to sell an estimated £329m tranche of shipping loans as it continues to shrink its non-core portfolio.