Lloyds could repay taxpayers
Shareholders came out in force for Lloyds Banking Group's recent rights issue with 87% choosing to take-up new shares.
This allows the part-nationalised bank to repay up to £2.3 billion of the £17 billion of funds received from the taxpayer last year.
The move makes Lloyds the first lender in Europe to return bail-out money after just eight months - far sooner than the government or the City had previously anticipated.
The £4 billion issue, underwritten by the Treasury, replaces government-owned preference shares (which were issued last autumn) with ordinary shares. This saves Lloyds an annual £480 million in dividend payments to the government and also opens the door to potential dividend payouts to private shareholders once again.
The relatively strong take-up means the government may not have to buy up any remaining shares, unless the remaining 13% of shares fail to sell on the open market.
If all disgruntled shareholders had snubbed the offer, the government's stake could have risen from its current level of 43% to 65%.
The leftover shares will be offered at no less than 38.43p - the same price in the original offer to shareholders on the open market. Any profits above this amount will be split between shareholders who did not take part in the fundraising.
City minister Lord Myners told the BBC Radio 4 Today programme that the move was “very real progress”.
“I think we have now moved into a new territory in which institutional investors are saying 'we now have confidence in UK banks, their capital is strong and they are clearly again lending and supporting the UK economy'. So it's good news,” he said.
He added: "The world economy is still in a very nervous condition, but there are some signs in areas traditionally regarded as leading indicators that the underlying economy is moving to a position where improvement can be envisaged.”
But Graham Spooner, investment adviser at The Share Centre, warns that despite the sucessful rights issue, the future of Lloyds is still uncertain in the short-term.
"Lloyds’ decision to buy HBOS last year has undoubtedly hindered the bank’s progress," he explains. "However, we hope that after this period of volatility, this new and enlarged group will benefit from its viability on the high street and offer some long-term value for investors.”
Lloyds chairman Sir Victor Blank issued yet another apology on 5 June – this time to his shareholders for the financial losses they suffered in the wake of the credit crisis and the disastrous government-brokered merger with HBOS.
Addressing more than 500 disgruntled shareholders at the group’s AGM in Glasgow, Sir Victor said: “The board is sorry about the decline in our share price and the financial difficulty the temporary suspension of our dividend has caused shareholders.”
However, he insisted that the HBOS deal was carefully considered. “Our due diligence was thorough,” he told the meeting. "We were very aware when we were doing the due diligence that this was a higher risk portfolio.”
His comments came in sharp contrast with those of chief executive Eric Daniels, who told the Treasury Select Committee the bank's board had not had sufficient time to conduct proper due diligence on HBOS's books before it agreed to the merger.
HBOS posted losses of almost £11 billion last year following reckless lending practices, plunging Lloyds into the red. This was the key cause of the bank having to go cap in hand to the taxpayer for a £17 billion bailout.
Sir Victor, who is retiring from his role in 2010, moved to reassure investors that stability is gradually returning to the sector although he cautioned that there is "no doubt that the short-term outlook is challenging".
However he maintained that the merger between HBOS and Lloyds puts the enlarged group in a strong competitive position.
“We continue to believe that the new and enlarged group will deliver significant benefits for you [shareholders] in the medium term," Sir Victor said.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Every limited company must hold an annual general meeting for its shareholders once a year to consider the company’s accounts, reports of directors and auditors and it is the only opportunity for shareholders to express their feelings to the board of directors. Shareholders also vote on the appointment/re-appointment of directors, although this may be sent to shareholders as a postal ballot.