British banks and insurers left reeling from debt exposure

The loans

Britain's banks and insurance companies were yesterday reeling from losses created by the accounting scandal at WorldCom. Banks including Barclays, Lloyds TSB, Royal Bank of Scotland and HSBC as well as Prudential, Britain's second-biggest insurer, admitted they are exposed to WorldCom through loans to the US telecoms business or through investments in its bonds.

An analysis of how banks might be exposed to WorldCom, circulated by analysts Fox-Pitt Kelton, shows that, of the UK banks, Lloyds and RBS loaned the most to WorldCom at $178m (£148m) each. But the analysts stressed the banks will have sold most of this loan to other institutions. Analysts believe RBS's exposure is slightly less than $100m while Lloyds could be hit for $50m. Barclays is believed to have exposure approaching $100m.

Despite the banks stressing that their exposures will not create material losses, the market shied away from their shares. RBS shares fell 60p to 1808p, while Barclays dipped 2.5p to 538p and Lloyds lost 15p closing at 645p. Nevertheless, analysts believe the sector's exposure to WorldCom is quite widely spread, with no one bank likely to be responsible for a big slug of the $2.65bn of loans the distressed company had made use of. Finance director Scott Sullivan was dismissed from WorldCom on Tuesday night after the extent of the financial crisis was uncovered.

The City believes most of the exposure will end with investors in WorldCom's $30bn of bonds, which also include banks, but will mainly affect insurers and fund managers. Mark Thomas, an analyst at Fox-Pitt Kelton, said: "There won't be any change to forecasts on earnings for two or three years' time, but this is very negative for sentiment ... and the market will rate banks down on the same earnings."

Prudential was the only company to give an immediate estimate of its liability, saying the cost to shareholders for the year ending 2001 will be $150m on WorldCom bonds bought by its US business. The insurer said there would also be a small exposure in its life arm from investments in the imploding company, but that it would be small. Prudential shares dropped 17.5p to 552.5p.

The latest difficulties will raise further questions about the strength of insurers' solvency, which has already taken a battering from two and a half years of negative markets and from a lull in consumer confidence.

Prudential and rivals CGNU and Royal & SunAlliance attempted to calm fears about their solvency, saying the difficulties would not force them to sell equities to bolster reserves.