Lloyds Banking Group PLC (LYG) brought relief to the market
Thursday, saying any decisions by the European Commission over
business divestments won't be material to the bank, a sign Lloyds
won't have the same fate as Dutch peer ING Groep N.V. (ING).
The U.K. bank also acknowledged it is in advanced talks with the
U.K. government on plans to escape an expensive asset-protection
scheme, which could include raising capital through a rights issue
and the use of a new instrument called contingent capital.
By avoiding the scheme, Lloyds, which became 43%-government
owned following a bailout last year, would avoid seeing that stake
rising to around 60%. That, in turn, would also mean the
Commission's remedies would be softer.
Lloyds is among many banks in the European Union that received
government help amid one of the worst financial crisis on record.
In exchange for that help, they now have to fulfill requirements
from the Commission, which wants to make sure aided banks aren't in
competitive advantage to those that stayed independent.
In Lloyds case, the Commission has to approve both the direct
aid the bank received from the U.K. and the asset-insurance
program. In exchange for that approval, it is pressuring the bank
to cut its market shares in business it is dominant, for
competitive reasons.
"Based on the discussions to date, [Lloyds] is confident that
the final terms of its [Commission-mandated] restructuring plan,
including any required divestments of assets, will not have a
material impact on the group," the bank said.
Analysts said the comments provide a major relief to the market,
which was expecting massive changes to the bank's operations in
line with those announced by ING this week.
ING was forced to sell major parts of its business to meet
competition requirements.
"This basically means Lloyds structure will remain intact. They
will have to cut market share in some areas, but the changes won't
be anything like ING is facing," said Irfan Younus, a bank analyst
at NCB Stockbrokers.
In its first statement after weeks of speculation on how it will
work to avoid the government's scheme, Lloyds said it will have to
pay the U.K. Treasury a fee if it doesn't participate in the
Government Asset Protection Scheme.
"There can be no certainty at this stage that any alternative to
the GAPS will proceed. All options remain open," the U.K. lender
said.
The scheme was drawn up to ring-fence banks' bad assets, and
Lloyds agreed to join in exchange for a fee and a larger government
stake.
The government would insure roughly GBP260 billion in Lloyds'
risky assets for a fee of GBP15.6 billion, which would be paid in
the form of nonvoting shares. The bank would also be responsible
for a first loss of GBP25 billion.
Since it agreed on the insurance in March, however, market
conditions have improved, and in September the bank said it was
considering alternatives to the expensive scheme.
Analysts speculate that it could instead add GBP25 billion in
fresh capital through a GBP11 billion rights issue and other
measures to avoid the plan, at least in part.
Lloyds didn't provide any figures in Thursday's statement, but
it said that "any alternative proposals to GAPS would be likely to
include a substantial capital raising of core Tier 1 and contingent
core Tier 1 capital."
It added that options currently under consideration include a
combination of a rights issue and contingent capital raising, and
the exchange of existing securities. Contingent capital is a
special debt instrument that would convert to equity during times
of financial distress.
The capital raising is expected to be fully underwritten and
will be subject to shareholder approval, Lloyds said.
The lender declined to comment further on the GAPS plan and
talks with the Commission.
Citing sources, Sky News reported Thursday that Lloyds would
sell its Scottish Lloyds TSB Scotland, its 164-branch Cheltenham
& Gloucester unit and online operation Intelligent Finance as
part of its deal with the E.U.
The bank was hard-hit by the financial crisis, especially
following its acquisition in January of ailing mortgage lender HBOS
PLC, which was pushed by the government.
The acquisition made Lloyds dominant in some markets in the
U.K., leading the Commission to request the bank to cut market
share for competitive reasons. There have been fears Lloyds would
have to sell 700-branch Halifax bank, a main reason why it bought
HBOS in the first place.
Lloyds also said Thursday that its trading performance "has been
robust" over the past few months, without providing details.
"This, added to the fact that Lloyds' future could soon be
clearer, means the worst might be over for them," an analyst
said.
At 1400 GMT, Lloyds shares were up 7 pence, or 8.5%, at 87
pence. The shares had been up about 3.8% before the company's
statement. Royal Bank of Scotland Ltd. (RBS), which is also under
pressure from the Commission to make divestments, saw its stock
jump after Lloyds' statement, gaining 3 pence, or 8.3%, at 43
pence.
Company Web site: www.lloydsbankinggroup.com
-By Patricia Kowsmann, Dow Jones Newswires. Tel
+44(0)207-842-9295, patricia.kowsmann@dowjones.com