Why Barclays' Mortgage Deal Is Not a Sign To Enter Ireland


Last week, Barclays (NYSE: BCS) acquired £4.3 billion ($5.8 billion) worth of Irish residential mortgage loans from Lloyds Banking Group (NYSE: LYG). The portfolio comprises around 27,000 mortgages, originated between 2004 and 2010. Of the total loans acquired, nearly £300 million are impaired.

Mortgage loan portfolio incurred a pre-tax loss of roughly £40 million in 2017. Notably, Lloyds is expected to record £110 million in pre-tax loss on the deal in second-quarter 2018.


So, why has Barclays purchased this loan portfolio? The bank is definitely not interested in entering Irish mortgage market.

Well, given the growing demand for securitized mortgage deals, Barclays plans to package and sell these Irish loans over the next two months. The group of investors that has shown interest in buying residential mortgage backed securities includes M&G Investments, the investment management division of British insurer Prudential Plc (NYSE: PRU) and Pacific Investment Management Co. ("PIMCO").

Though the deal looks similar to the repackaging of home loans for resale to investors that was one of the primary reasons for the 2008 financial crisis, certain changes in the regulations as to how such deals are to be formed and sold means that these are expected to be less risky.


Under the new rules, Barclays will be required to retain at least 5% of the Lloyds' mortgages. This will align with the bank's interest in the deal similar to other investors.

Additionally, the securitization deal is not expected to hurt Barclays' capital in the long term.

This agreement comes at the heels of another one announced last month. Barclays, along with other investors had purchased £5.3 billion worth of residential mortgages from the British ‘bad bank.' PIMCO funded the deal, with Barclays and five other banks planning to buy RMBS to help finance the acquisition.


As European banks intend to focus on their core operations and shrink balance sheet with an aim to comply with stringent capital rules, such deals are likely to continue.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.