Lloyds Banking Group exposed to more Bad Debt

Lloyds Banking Group has warned markets it was facing a bigger than expected hit as the scale of Ireland’s economic troubles worsened and as a result Lloyds share price was down as much as 6% before recovering slightly on the close.

As the news filtered through on Friday, other bank shares followed suit with RBS recording a fall of 5.5% to 37¾p. As such, Lloyds, (41% owned by the taxpayer), said it had increased provisions against bad debts on its £27bn Irish loan portfolio by some £2.7bn, which was over £1.bn higher than the City was expecting.

The banks took the move to sure up its bad debt provision after Ireland accepted a massive EU bailout package and imposed stinging and far reaching austerity measures earlier this month leading to public outcry, widespread protests and some violent disorder.

The biggest hit to the banks in write downs are again in respect of downgraded commercial property assets and securities. After the news broke on Friday analysts warned that Lloyds’ statement would be similarly bad news for Royal Bank of Scotland owing to its increased exposure to Ireland via its Ulster Bank holding.

A city analyst, Julian Dickerson was quoted as saying “….RBS needs a further £8billion of loss reserves against its Irish book.”

Although ratings agency Moody’s has slashed Ireland’s credit rating from Aa2 to Baa1, just three levels above ‘junk’, the Bank of England (although issuing a recent warning of the risk to banks from the Euro Zone debt crisis), had stated that it believed UK banks were largely disconnected from the problems in Ireland, Portugal and Spain.

The EU and the European Central Bank have still insisted that the 16-nation euro will be preserved as speculation mounts as to the impact on the already fragile economies of the Euro currency States and their ability to recover.

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