Lloyds buys Tesco home loan book for $4.6b

Bloomberg

Lloyds Banking Group Plc is snapping up Tesco Plc’s mortgage portfolio for about 3.8 billion pounds ($4.6 billion) as the British bank bets the UK economy will hold up despite the prospects of a disorderly Brexit.
The country’s biggest mortgage lender is tightening its grip, acquiring over 23,000 mortgage customers as part of the deal, according to statements from both companies. Tesco, which has been cutting costs and slimming staff, said in May that it’s ending mortgage lending and exiting its home loan book, citing challenging conditions that have pushed some smaller lenders out of
the market.
It’s in line with Tesco Bank’s “strategy of focussing on a reduced number of products and services that serve the broad range of Tesco customers, and will reduce operating and funding costs,” the supermarket operator said in its statement on Tuesday.
Tesco shares fell 0.6 percent in early London trade, while Lloyds slipped 1.3 percent.
The Lloyds purchase comes amid warnings that UK banks could see a decline in profitability as the risk of a no-deal Brexit increases.
Citigroup Inc has estimated that such an event could cut domestic banks’ earnings by as much as 25 percent, while UK house prices have been falling over Brexit and higher property taxes.
Lloyds has taken a less downbeat tone and is one of the few UK banks to not make a large provision for a Brexit-related downturn. Still, Chief Executive Officer Antonio Horta-Osorio has said that continued uncertainty over the UK’s EU withdrawal could affect the economy.
A “strong free capital build gives us flexibility to consider inorganic growth opportunities in selected target areas where we see value for shareholders,” the bank said. “The transaction is in line with this approach.”
In May, Lloyds was given more breathing space on its capital requirements. It has lowered its targets for its CET1 ratio, a measure of capital strength, to around 12.5 percent, potentially freeing up about 1 billion pounds in excess capital. The purchase will be funded using existing “internal resources” with minimal impact on capital, Lloyds said.
The deal is Tesco CEO Dave Lewis’s largest divestment since the 4 billion-pound sale of Korean assets four years ago. In his five years leading the company, Lewis has trimmed debt enough for the supermarket operator to regain its investment-grade credit rating at Moody’s Investors Service.