-- Daniel Flatt
Lloyds TSB said it will take a hit of approximately £200 million ($409 million) from its exposure to the deepening credit market crisis despite limited exposure to subprime debt. Despite the loss, the U.K. lender expects to post pre-tax profits 11% up from the previous year.
In a trading update issued today, Lloyds TSB said it had no direct exposure to U.S. subprime asset-backed securities and only limited indirect exposure through ABS collateralized debt obligations. During the four-month period through Oct. 31 this year, however, Lloyds wrote down £89 million ($182 million), leaving a residual investment of £130 million ($265 million) to ABS CDOs, net of hedges. The writedown largely reflects junior tranches of CDOs, the bank said.
In the same period, the group also wrote down the value of its structured investment vehicle assets by £22 million ($44 million), leaving a residual exposure at Oct. 31 totalling £78 million ($159 million). Additionally, the group had undrawn commercial paper back-up liquidity facilities totaling £377 million ($770 million), of which £89 million has subsequently been drawn. All of these liquidity lines are senior facilities.
Lloyds corporate markets division also saw a reduction in profit before tax of approximately £90 million ($184 million) as a result of the impact of mark-to-market adjustments in the group’s trading portfolio, to reflect the market-wide re-pricing of liquidity and, to a lesser extent, credit. Lloyds said, “At 31 October 2007 the trading portfolio contained £181 million of indirect exposure to U.S. subprime mortgages and ABS CDOs. This super senior exposure is protected by note subordination.”
Going forth, Lloyds is unlikely to reduce its exposure to ABS or CDOs. "We believe what we currently have is high quality and therefore we believe its value will come back when the market returns to normality,” a Lloyds official said.