Successful Mortgage Bonds Auction Fails to Support Lloyds’ Share Price

on May 31, 2013
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Lloyds Banking Group (LON:LLOY) has sold a portfolio of U.S. residential mortgage-backed securities (RMBS) for ₤3.3 billion as part of plans to strengthen its capital and focus on domestic lending. Despite the successful sale, the British bank’s share price fell by more than one percent to ₤0.6115 in volatile early morning trading in London on Friday, May 31. The stock has climbed by almost 30 percent in the year-to-date.

Lloyds, which is 39 percent state-owned, said in a statement on Friday that it would book a ₤540 million pre-tax profit from its U.S. mortgage portfolio, which had been sold to Bank of America, Morgan Stanley, Credit Suisse and Goldman Sachs.
The banks had bid for five groups of assets, with Morgan Stanley having taken two of the pools of home-loan bonds without government backing, Adam Murphy, president of data-provider Empirasign, told Bloomberg in a telephone interview on Thursday. About ₤170 million had been sold to Goldman Sachs for approximately ₤200 million in cash, Lloyds said. Goldman is expected to realise a pre-tax gain of some ₤30 million on a sale of this part of the portfolio.

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Lloyds estimated that the RMBS sale would increase its common equity tier 1 capital ratio by ₤1.4 billion and its core tier 1 capital ratio by ₤950 million. As part of the deal the Lloyds TSB Group Pension Trust also sold its share of the portfolio of RMBS with a book value of ₤805 million. The pension trust will book a pre-tax gain of ₤360 million, which will go towards reducing the scheme’s deficit. The transaction is expected to close in the first week of June.

The sale took place amid continuing recovery of the U.S. housing market, which posted the largest price gain in seven years in March. At the same time demand for subprime mortgages not backed by Freddie Mac and Fannie Mae has jumped since the start of 2012 as central banks continue to curb yields on safer debts. According to data from Barclays Investors cited by the Telegraph, returns on subprime mortgage bonds surged by 41 percent last year and have climbed a further 12.7 percent this year.

**Lloyds Slimming Down**
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Lloyds, which was rescued by a ₤20.5 billion bailout in the 2008 financial crisis, has been exiting non-core businesses, while boosting its capital in preparation for an eventual sale of the government’s stake. Earlier this week the banking group said that it planned to sell its Geneva-based private bank to asset management group Union Bancaire Privee (UBP) for some ₤100 million – ₤65 million upfront and a further ₤35 million depending on performance in the next two years. The business for sale has assets under management of ₤7.2 billion, 500 staff and branches in Gibraltar, Monaco and Zurich.

Lloyds has divested from ₤6.3 billion of non-core assets in the first three months of the current year and expects to cut non-core assets to below ₤70 billion by the end of 2014. The lender’s stock is currently trading above ₤0.61 – the price at which the government says it will break even on its 39 percent stake.
**Lloyds’ share price was ₤0.6141 as of 31.05.2013, 09.53 BST.**

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