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Shares in Lloyds Banking Group dropped 5p to 97p as the market reacted cautiously to the growing likelihood that it will launch a multi- billion pound rights issue after Sir Win Bischoff takes over as its new chairman next month.
Such a move would not only allow the bank to spend less money on the Government's Asset Protection Scheme, which sees the taxpayer insure its worst debts, but also prevent the Treasury raising its stake from its current 43% to 60%.
Bischoff and chief executive Eric Daniels are both said to be keen to keep the taxpayer stake in Lloyds below the controlling 50% level.
It is unclear whether a rights issue of up to £16 billion would be backed by the Government through the body which holds its stakes in the nationalised and part-nationalised banks, the UKFI. It was instrumental in Bischoff replacing Sir Victor Blank as chairman of Lloyds earlier this summer.
“We really don't see how this could work,” said one top shareholder.
Lloyds and the Treasury announced in February that the bank would insure £260 billion of bad debts with the Government at a cost of some £15.6 billion with Lloyds picking up the first 10% of losses.
But after last week's first half results in which Lloyds announced £13.4 billion of bad debt provisions, analysts have questioned the scale and cost of the insurance.
Rival Royal Bank of Scotland which is 70% owned by the taxpayer and is planning to take up £325 billion worth of asset protetction is far less likely to seek to raise extra capital before it agrees the scheme.
Both banks are finalising with the Treasury the exact toxic loans and instruments which will be covered by the taxpayer bail-out.
Analysts said any attempts to reduce Lloyds' exposure to the asset protection scheme would be welcome but fund-raising could prove difficult.
Manoj Ladwa, senior trader at ETX Capital, said: “Though it is clear that the billions of pounds that the scheme costs are a major issue for Lloyds, it may be a struggle to get this away. Both banks raised £4bn in rights issues in the last 12 months and question marks exist as to whether the market has the appetite for more.”
A Lloyds spokesman declined to comment on any possible rights issue but said: “We are working with the Treasury to finalise the detailed terms of our intended participation in the asset protection scheme. We expect to conclude those discussions and agree terms that are in the best interests of our shareholders.”
Royal Bank of Scotland shares fell 3p to 43.9p in sympathy.
Reader views (1)
The treasury should allow the rights issue but put in the caveat that Lloyds must repatriate the toxic loans within 5 years at no less than the price the government has so generously paid with taxpayers money
Perhaps we can then see what how the market really values toxic debt.
Getting out of Crash Browns mess across the board is going to be a long haul and the notion that £15 billion will make any difference when put against the toxic they have passed to the treasury is irrelevant to the bigger picture.
The problem is Labour need good news fast and having sold UK plc down the river the don't care what shape the news comes in now or what the cost will be. Anything to stay in office is possibly their catch phrase now.
What they just can't see is that investors and the voters in general are sick of the Brown and co and fear what further dfamage they will inflict on the country.
If Darling had guts he would tell Lloyds to cut the idea now.
- Robert Marshall, LONDON
