Bailed-out banks sitting on huge losses

13 July 2009

The body that manages the government's stake in the bailed-out banks has warned that bringing these institutions back into the private sector will be “challenging” as they sit on paper losses of £10.9 billion.

UK Financial Instruments (UKFI) says the taxpayer's stake in Lloyds Banking Group is currently worth £6.2 billion less than the government paid, while the Royal Bank of Scotland's stake is worth £4.7 billion less.

The government ploughed £20 billion into RBS and £14.5 billion Lloyds last autumn when the financial crisis was at its worst. It bought RBS shares at 51p and Lloyds shares at 120p. These were trading at 35.45p and 62p respectively earlier today (13 July 2009).

However, the losses, which do not include the shares involved in the government’s asset protection scheme, are less than the £18.1 billion shortfall recorded in February.

A report by UKFI states it is still focussed on returning the banks to the private sector but adds that it will be a tough job to recoup all of the cash loaned by the taxpayer: “The amounts involved are very large, and a successful disposal of our holdings will require professionalism and patience.”

UKFI has not set a fixed timetable for the sale of the shares. Instead, it expects to sell of its holdings in tranches over a sustained period. The group adds that it had seen an improvement in the economy and banking sectors recently, although it also warns it is too early to judge if conditions are right to start selling off shares.

“Skilled disposal of these investments will recoup tens of billions of pounds for the taxpayer," it says.

UKFI believes the government will most likely opt for an initial public offering of the stakes when it feels the times is right to sell: “While there are many possible approaches open to us, including strategic sales, our central assumption in thinking about our disposal programme is that we are likely to be selling shares to investors in the public equity markets.” 

However, analysts at UBS warn that bad loans on Lloyds’ mortgage and commercial property books along with corporate lending, could lead the bank to write off as much as £13 billion when it posts its first–half results on 5 August.

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