Lloyds TSB: Still a Good Bank but Invest with Caution

My firm sold Lloyds TSB Group (LYG) a couple of weeks ago. I still think it’s one of the best run banks in the world, but its exposure to loans underwritten by other banks made us pause and rethink our thesis.

LYG has a securitization conduit called Cancara. It uses the conduit to securitize some of the loans it generates. There’s no problem there. LYG has proven to be very conservative in its underwriting and that’s why it sports a very rare AAA rating by S&P.

However, about two thirds of the $25 billion Cancara conduit are loans that have been generated by other banks. For a fee, LYG allowed other banks to fold their loans into Cancara and LYG basically insured those loans by its own balance sheet. Call me paranoid, but other banks have little incentive to care about the quality of the loans. Now, LYG is on the hook, not them.

This was my reasoning to sell the company I praised for a very long time. Again, there’s a good chance this may end up being nothing. We’ll monitor the performance of Cancara loans for awhile and may buy LYG back at some point in time.

Comments

[Lilliana]

Do you honestly think LYG, the ultimate in financial conservancy, wouldnt look carefully at the quality of loans being accepted into cancara.?
If LYG did (IOHO) not carefully view acceptance of doubtful loans into its cancara structure this would would be an act of gross neglect in its fiduciary responsibility towards shareholders..somethig we cannot invisage or believe being accepted from /byLLOYDS.
However, we will watch the situation.
Thankyou for your views.
lilliana.

[User 225693]

Exposure to "client" is about 8billion $ .
If all has to be written of yeah that would be 2 times 2007 profit.
But only 200Milliion is US Subprime. Yes LYG was a bad investment if you bought the share 2007, but from 275pence a share there is not downside left. 12% dividends to be paid. Even if cut in half for a year would make a decent reward.
From the 2007 report:
The Group’s investment in Cancara, our hybrid Asset Backed Commercial Paper conduit, was £12.0 billion at 31 December 2007, comprising £8.3 billion ABS and £3.7 billion client receivables transactions. Cancara, which is fully consolidated in the Group’s accounts, is managed in a very conservative manner, which is demonstrated by the quality and ratings stability of its underlying asset portfolio. At 31 December 2007, the ABS bonds in Cancara were 100 per cent Aaa/AAA rated by Moody’s and Standard & Poor’s respectively, and there was no exposure either directly or indirectly to sub-prime US mortgages within the ABS portfolio. Since the year end, ABS totalling £67 million have been downgraded. At 31 December 2007 the client receivables portfolio included £115 million of US sub-prime mortgage exposure.

[Menachem Ben Yakov]

Mr.Katsenelson was fortunate to sell at a approx. $45/share. I just loaded up at $22.05 and have been waiting seven years for that opportunity.
I wondered if the author is out buying shares again?