Fears grow over Lloyds' £3bn exposure to Brazilian economy

Concern is growing that Lloyds TSB has one of the highest exposures to the turbulent Brazilian economy among UK high street banks, prompting fresh speculation that it will cut its dividend.

Analysts yesterday said Lloyds has £2.8bn of exposure to the country. This is thought to be higher than any of the clearing banks apart from HSBC, which invests heavily in other parts of the world and has a £3.8bn exposure to Brazil.

Lloyds, whose chief executive is Peter Ellwood, surprised the City when it said at the time of its interim results in June that it was would make provisions of £350m for potential bad debts in Brazil, but the bank wrote down only £18m for losses on Brazilian government bonds.

The research house Fox-Pitt Kelton yesterday published a note saying Lloyds might have to take a charge in the second half of £400m. This would be equivalent to 12 per cent of full-year pre-tax profits and would knock 24 basis points off the bank's tier one capital ratio.

Fox-Pitt said the charge would be a "worse-case scenario", based on a 30 per cent devaluation of the real, the Brazilian currency. The research house added that its estimate was "very conservative" and unlikely to be as high as £400m.

Lloyds' shares fell 10p to 560p yesterday as another analyst, ING, also highlighted its potential new losses from Brazil, whose unstable economy and political upheaval have prompted fresh concerns about the strength of stock markets around the world. The country's interest rates shot up recently to 21 per cent.

The country is in the middle of elections, with Luiz Inacio Lula da Silva, a leftist candidate, expected to win the second stage of presidential elections. The candidate, known as Lula, is viewed with suspicion by the corporate world over suggestions he might default on some of Brazil's debt pile.

ING said Lloyds' £1bn investment in Brazilian government bonds and £1bn in consumer loans looked shaky.

Lloyds sought to discredit suggestions that its exposure to the Latin American country's economy would cause problems. The bank said most of its government bond portfolio was in domestic debt. These bonds are trading at only slightly less than their original value, making it reasonably likely they will not default before they mature.

A spokesperson for Lloyds said: "The situation is volatile in the light of the election and we are watching it closely. But the value of our bonds have not dropped as much as others."

The City has been speculating for some time that Lloyds might cut its dividend, which has one of the highest yields in the UK banking sector.

Michael Helsby, an analyst at ING, said he did not forecast a dividend cut, but said Lloyds has "very little, if any, headroom to cope with a reduction in profits".