Bailed-out banks set for windfalls as distressed debt markets recover

Chance to offload bad loans comes as Lloyds Banking Group considers returning to the dividend list

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The Independent Online

Britain’s state-backed banks could offload billions of pounds of bad loans, amid huge growth in demand for distressed debt.

That could provide a windfall for banks such as Royal Bank of Scotland and Lloyds, and even the state-owned Northern Rock Asset Management (NRAM), which was left with the taxpayer after Virgin Money completed the acquisition of the “good” part of the failed bank in 2012.

NRAM also includes Bradford & Bingley, which was integrated with the operation in 2010.

PricewaterhouseCoopers (PwC) says that more than €100bn (£75bn) of unwanted loans could be offloaded by banks across Europe this year, compared to €90bn last year and just €64bn in 2013. And it says prices are getting higher.

The research comes as Lloyds is hoping to start paying dividends again for the first time since the 2008 financial crisis.

The bank is expected to ask  regulators at the Bank of England this week for permission to pay a “token” dividend to investors when it releases results later this month, given how its financial position in general has improved.

Lloyds, which is 25 per cent owned by taxpayers, still had bad loans worth £23bn on its books as “run-off assets” at the time of half-year results in September, although this was down from £33bn at the end of 2013.

The ease with which banks are now able to sell packages of loans contrasts sharply with the situation after the 2008 financial crisis, when the market all but collapsed. Recovery has been slow, but last year’s €90bn of sales was itself a sharp improvement on the 2013 figure of €64bn.

Richard Thompson, the partner at the PwC’s Portfolio Advisory Group, said that some €40bn of transactions were already progress this year. He said he couldn’t comment on individual banks, but that there is now “a very active market” for debt.

“There is significant interest from both financial and strategic investors, even certain banks for debt which is at the higher performance levels. You can see from stats that there has been significant growth in the market.”

Mr Thompson cautioned that there is still €2 trillion in unwanted loans sitting on the books of banks across Europe. Despite the amount potentially available, Mr Thompson said that pricing was going up, because it is being matched by demand and the ability of institutions to finance deals.

“A number of factors have come together which have meant good news for banks looking to get run of unwanted loans,” he said. “The market is maturing and plenty of equity has been raised to give investors the capacity to spend. With greater certainty about the economy and about asset prices, it has given buyers more confidence.”

If the pick-up in the market helps Royal Bank of Scotland in particular to offload “non-core” assets ahead of schedule, it could help future ministers to start the process of reprivatisation after the general election.

The taxpayer still owns 81 per cent of the bank, which also has a cloud of regulatory and legal difficulties that may have to be resolved before any share sale. 

UK Financial Investments, which overseas the Government’s interests in banking, has been steadily selling packages of Lloyds shares into the market, but that bank is far further along in its recovery than RBS.