Lloyds and RSB resist larger taxpayer stake
Lloyds Banking Group says its better-than-expected results mean it might not to need to participate in the government's bad-loan insurance scheme.
Meanwhile, Royal Bank of Scotland (RBS) says it is looking at alternative ways to raise funds to potentially scale back its involvement in the government’s Asset Protection Scheme.
Lloyds says it is in talks with the government over changes to its potential participation in its asset protection scheme. This could see it scaling back its involvement in the insurance scheme and examining “potential alternatives”.
The banking giant, which is 43% owned by the government, had initially planned to insure £260 billion of its most toxic assets against further losses.
These were mostly related to the acquisition of HBOS. In return, taxpayers would have taken a larger stake in the group - potentially as large as 65% - which would have further hindered its ability to make independent decisions.
However, Lloyds is now reconsidering its options after its performance improved in the first half of the year and its losses from bad loans proved better-than-expected.
“In light of improving economic conditions and the results of Lloyds' detailed reviews of its loan portfolios and their expected performance, Lloyds and HM Treasury are discussing possible changes to the commercial terms on which Lloyds might enter into the scheme from those announced in March 2009, including the possibility of reducing the amount of assets covered by the scheme,” the company said in a statement.
Previous reports had suggested that Lloyds' boss Eric Daniels and several of the bank's key investors believed the £15.6 billion worth of fees - in shares - to insure around £260 billion of toxic assets is too pricey. They are also worried that the move would give too much control to the government.
In August, speculation abounded that the bank was considering raising up to £15 billion from shareholders to help it scale back its participation in the asset protection scheme.
However, the Financial Services Authority has been piling on the pressure for the bank to remain in the scheme. Results of the financial stress test carried out this week are believed to have shown that the bank’s capital needs could exceed the amount of cash it could potentially raise in the markets.
The group added that “all possibilities remain open”.
RBS, which is 70% owned by the taxpayer, is also reportedly sounding out key investors about potentially issuing preference shares or launching a rights issue of up to £4 billion. If there is sufficient support, RBS could start down its alternative route within weeks.
However, unlike Lloyds, the bank is not trying to get out of the asset protection scheme altogether.
RBS is understood to remain in discussions with the Treasury over “fine-tuning” the terms of its participation. Chief executive Stephen Hester had been due to finalise the details this autumn although ongoing talks over potential changes would push back the date.
Back in February, RBS said it would insure £325 billion of risky assets for a fee of around £6.5 billion – met through the issuance of B shares. It would then be responsible for absorbing the first £19.5 billion of losses.
The government’s stake in the bank could potentially rise to as high as 84.5% if shareholders refuse to fund the fees. In this case, the taxpayer-owned stake would remain around its present 70% level.
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.