Lloyds Banking Group staff are due to be given details of their bonuses totalling around £80 million, despite the bank now being 65% owned by the taxpayer.
On Saturday 7 March, Lloyds confirmed that it would take part in the government’s Asset Protection Scheme with £260 billion of toxic loans insured by the Treasury. In return, Lloyds has promised to boost new lending by a whopping £228 billion.
This figure dwarfs lending commitments made by other state or semi-state owned banks. Royal Bank of Scotland, which is also participating in the Scheme, is increasing new lending by £25 billion over the next 12 months in return for the government insuring £325 billion of its bad debt. Northern Rock also plans to increase its lending by £14 billion by 2011, with £5 billion this year alone.
The move means the government’s stake in Lloyds Banking Group, which was created after the merger of Lloyds TSB and HBOS, has increased from 43% to 65%. At the end of February, Lloyds admitted losses of over £10 billion.
Its share price fell by around 7% on the back of the news when the markets opened today (9 March).
Eric Daniels, group chief executive at Lloyds Banking Group, said: “Participating in the government’s Asset Protection Scheme substantially reduces the risk profile of the group’s balance sheet. [This will] ensure the group can weather the severest of economic downturns and emerge strongly when the economy recovers.”
He added: “We believe that this is an appropriate deal for our shareholders.”
Under the Scheme, Lloyds will bear a loss of up to £25 billion, with 90% of any further losses borne by the Treasury. It is anticipated that around 83% of the losses will come from both HBOS’ and Lloyds’ legacy lending books.
Lloyds Banking Group will pay the Treasury a fee of £15.6 billion over a seven-year period in return for participating in the Scheme.
Despite the bank is now 65% owned by the state, staff are still set to receive bonuses of around £80 million. However, members of the board have pledged to forgo their remuneration payments and Lloyds says the average wage of staff due to receive bonuses is just £17,000.
Simon Denham, managing director of Capital Spreads, says Lloyds' share price will take a sharp hit during trading today, as investors jump ship.
"It was almost inevitable that the group was going to end up with such a huge amount of its assets insured in the Asset Protection Scheme," he adds. "The only real good thing to have come from the whole of this dire situation is that we have now drawn a line in the sand and one could almost go as far as to say that the banking sector is through the worst, although there could well be the odd skeleton lurking in the cupboard."