Lloyds could walk away from toxic asset scheme

Nick Goodway
18 Sep 2009

Lloyds Banking Group today said it has not ruled out withdrawing from the Government's insurance scheme for toxic assets (GAPS).

It rushed out a statement to the Stock Exchange in the wake of reports that the Financial Service Authority (FSA) had said Lloyds — which announced its ill-fated takeover of HBOS a year ago today — would fail the regulator's stress test if it withdrew altogether.

Lloyds chief executive Eric Daniels would prefer to raise fresh capital through a £15 billion-plus rights issue. But the FSA does not believe that would be enough to bolster its balance sheet ratios to high enough levels.

The bank said: “Lloyds is continuing its discussions with HM Treasury with respect to its possible participation in GAPS. However, 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 GAPS from those announced in March 2009, including the possibility of reducing the amount of assets covered by the scheme.”

Lloyds agreed in March to cover £260 billion of its riskiest assets under the scheme at a cost of £15.6 billion, which would see the taxpayer's stake in the bank rise from 43% to 62.5%.

But in the six months since that announcement, Daniels has been locked in discussions with the Government, other major shareholders and the FSA over cutting the scale of Lloyds' take-up of the scheme. He is eager to keep the Government stake below 50% and also regularly points out that Lloyds is so far the only bailed-out bank in Europe to have paid back any taxpayers' money. It redeemed £4 billion of preference shares earlier this year.

Today's stock market statement continued: “Lloyds is also considering possible alternatives to entering into GAPS and is in discussions with HM Treasury, UK Financial Investments and the Financial Services Authority in this regard. All possibilities remain open and, as part of this process, Lloyds is focused on ensuring that any potential alternatives to GAPS would be in the interests of shareholders and other stakeholders.”
Credit Suisse analyst Jonathan Pierce calculated that Lloyds would need to raise £25 billion if it wants to avoid the asset protection scheme altogether.

Lloyds would find it hard to raise that much through a rights issue and even with the sale of assets like Scottish Widows or Cheltenham & Gloucester.

Lloyds' new chairman Sir Win Bischoff, who took over from Sir Victor Blank this week, is now likely to investigate with Daniels just how the bank can reach a compromise with a smaller rights issue and slimmed down take-up of the asset protection scheme.

The Treasury has also been locked in talks with the European Commission over state aid to both Lloyds and Royal Bank of Scotland. That covers not just the original £37 billion bail-out of last October but also the likely competition benefits of the asset protection scheme, which although it has not been finally signed, has effectively been in place for the last six months.

European competition commissioner Neelie Kroes, who is due to step down next month, said yesterday that she would accelerate discussions.
“You can be assured we are indeed speeding up because time is running out,” she said.
Lloyds shares fell 1.5% to 108p.