View from City Road: Debt could pay dividends

BACK IN February, Brian Pitman, chief executive of Lloyds Bank, said that when Brazil and Argentina had reached agreement on a debt restructuring with their commercial banks then Lloyds would have another look at its Third World debt provisions. This is of more than passing interest to shareholders a fortnight ahead of the interims, because at the time of the full-year results Lloyds had a pounds 900m surplus of Third World debt provisions over their market value.

It had provided on the assumption that its pounds 3.6bn of outstanding loans was worth only pounds 900m. But at the rates quoted in the secondary market for Third World debt the value was then pounds 1.8bn, a premium against book value of 51 per cent. The bank had stuck its neck out by keeping so much suspect debt, but compensated by taking a cautious view of its value.

Argentina reached an outline agreement in April on its dollars 23bn of bank debt. Brazil and its bank steering committee announced last week they had concluded a deal on dollars 44bn of commercial bank debt. This has yet to be approved by the creditor banks as a whole. But with Brazil alone owing Lloyds nearly pounds 900m, the time has clearly arrived for some careful thought about provisions.

According to Salomon Brothers, Argentina was trading at 37.5 per cent of face value at the turn of the year, but has now reached 50 per cent. Brazil was at 31 per cent but has risen to 37 per cent. These increases should more than offset the effect of the fall in the dollar, so Lloyds is justified in embarking on a full review of its problem country debt portfolio. But how much will be written back?

The best guess is that there will be a cautious approach, with write-backs every six months, and the impact on profits spread over several years. The cumulative effect is also likely to fall well short of pounds 900m. Latin America, full of promise, has a habit of disappointing its admirers. Nevertheless, this could be a significant and regular boost to profits, unavailable to most other clearers apart from Midland, where the numbers are much smaller. It should help to support a rise in Lloyds' dividend.