UK banks boost profits by selling UK loans to foreign lenders

LONDON (Reuters) - UK banks are selling hundreds of millions of pounds of performing syndicated loans for UK companies to foreign banks as they try to boost profitability by reducing their exposure and even exit unprofitable relationships altogether as pressure on balance sheets grows.

A view of the London skyline shows the Canary Wharf financial district of London (in the background) and the Walkie Talkie building (R), in the City of London, seen from St Paul's Cathedral in London, Britain February 25, 2017. REUTERS/Neil Hall

Barclays, HSBC, Lloyds and RBS are quietly selling large chunks of investment-grade and near investment-grade loans for UK companies in the secondary market that do not meet their targeted returns.

“I estimate that hundreds of millions of euros have changed hands, even billions. RBS, Lloyds and HSBC -- we’ve bought assets from all of them,” a senior loan trader said.

Loan commitments of €70m-€150m that pay 40bp-60bp are being sold on a single name basis, primarily to liquid Asian banks, including Japan’s MUFG, Mizuho and SMBC and China’s ICBC, and some European banks that are buying debt in UK companies with ties to their economies, sources said.

“They are all investment-grade companies where we’ve taken over the relationship and taken the UK banks out of the deal entirely. The tickets are usually €100m, mostly denominated in euros, and a few are denominated in sterling,” the senior loan trader said.

Another international bank said that it was being shown individual assets and had bought pieces of three investment-grade loans for UK companies, rather than full relationship positions.

UK and European banks have been cleaning up their balance sheets for several years with multi-billion euro portfolio sales, as they refocus on their top earning clients and areas of expertise, which has brought a more domestic focus on their home markets and clients.

Holding loans can be expensive due to increased regulation and higher capital requirements and most banks need more ancillary business to subsidize low-priced loans to investment-grade companies and hit return targets.

Term loans are more capital intensive from a capital perspective than undrawn revolving credits.

“All banks are being forced to rationalize with such intense scrutiny on balance sheet. They are facing inevitable questions on why they’re lending and what they have achieved in the last three years,” a senior loan banker said.


UK banks, particularly RBS and Lloyds, have been scaling down their international operations since the financial crisis. RBS sold a £3bn portfolio of US and Canadian loans in February 2015 and a £3.69bn portfolio in April 2015 and has reduced its Asian lending.

Lloyds is almost predominantly focused on the UK market now and has cut its international footprint to six countries, from 30 in 2011.

This is the first time, however, that UK banks have had a big clear out of UK clients that do not meet their return requirements and are cutting their exposure to domestic companies, several bankers said.

Lloyds tried to sell US$250m of loans for UK independent oil company Premier Oil in an auction last November, but withdrew the auction after the loans failed to attract bids and meet the reserve price. Lloyds subsequently came under pressure from Premier Oil not to sell as the company struggled to complete a key loan refinancing.

“I’m surprised that UK banks are selling UK loans. They retrenched to their home market, but now they’re exiting local relationships too. I don’t think it’s Brexit related, it’s more to do with profitability. Now that they’re focusing on their home market, if it doesn’t make the return model, it’s got to go,” the senior loan trader said.

The Bank of England is aware of the situation and is in the early stage of looking into the matter, sources said. The Bank of England declined to comment.

Some UK companies are refusing to give UK banks consent to sell and transfer the loans in a bid to try to stop their debt being held by foreign lenders, but this can turn UK banks into ‘hostile lenders’, which can refuse to agree to waivers or refinancings or even block them.

“The problem is that even if UK banks find a seller, some corporates are not agreeing to the transfer of their loans,” a second senior loan banker said.

Post Brexit, some UK companies are eager to forge new relationships with non-EU lenders, particularly if they have expansion plans in those geographies, and are keen for UK banks to sell their loans so that they can establish relationships with Asian or US banks.

Barclays and HSBC declined to comment, Lloyds and RBS were not immediately available to comment.

Editing by Christopher Mangham