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Lloyds in talks over role in bad debt scheme
LLOYDS Banking Group said it may cut its participation in a Government scheme to insure its riskier assets against bad debts as it sees the economy improving.
The banking giant, which has seen impairments rocket since it bought the UK's biggest mortgage lender, Halifax Bank of Scotland, yesterday said it is in talks over scaling back or even cancelling its participation in the asset protection scheme (APS).
Lloyds said "in the light of improving economic conditions" and detailed reviews of its asset portfolios, it is talking to the Treasury to discuss changes to the commercial terms of entering the scheme.
The bank added it is also considering "possible alternatives" to entering the scheme, and is discussing these with the Government, city watchdog the Financial Services Authority (FSA) and UKFI, which holds the taxpayer's 43.5 per cent stake in Lloyds.
Reports claimed the FSA has imposed tougher-then-expected capital tests on the bank, hindering its exit from the scheme.
But yesterday the bank insisted: "All possibilities remain open and, as part of this process, Lloyds is focused on ensuring that any possible alternatives to (the APS) would be in the interests of shareholders and other stakeholders."
Lloyds, anxious to scale back its dependence on state aid to limit the penalties European regulators are looking to impose on it amid competition concerns, is believed to have been told it must raise capital if it is to limit or even cancel its participation in the APS.
Analysts say the bank would have to raise up to 20bn via a cash call – the biggest yet – if it were to quit the APS. It would need the capital to satisfy regulators it could absorb future impairments on its own.
Under a deal announced in March, Lloyds was to pay the Government shares worth 15.6bn in return for taxpayer-backed insurance against losses on 260bn of its riskier assets. However, final details of the programme have not yet been agreed and the bank has reportedly been trying to wriggle out of the scheme as it views the economy improving.
Lloyds is keen to ensure the Government does not increase its stake above 50 per cent, which would have been unavoidable under the original plan.
"The consensual position in the market is that Lloyds will end up with a hybrid of a slightly scaled-back APS, plus some capital raising," said Exane BNP Paribas analyst Ian Gordon.
"The idea of Lloyds exiting the APS is unlikely primarily because raising 15bn to 20bn isn't a viable option." This could mean Lloyds seeking to raise a smaller sum from investors, plus using the APS for a smaller amount of insurance.
Lloyds, saddled with bad debts from HBOS, said last month it believes the number of loans turned sour peaked during the first half of the year and will be lower in the second half.
The bank has said European competition regulators may require it to make disposals, possibly of core businesses, in order to win approval for the APS support. But the European Commission has dismissed reports Lloyds may be forced to sell the Halifax as "premature speculation".
Ed Woolfitt, head of trading at Galvan, said: "The most likely outcome... is for a rights issue or fundraising that will effectively wrest a degree of control and ownership back from HM Government."
Safety net for banks' assets
The asset protection scheme (APS) is intended as a safety net to insure banks' assets against bad debts, thus encouraging them to increase lending.
Under the scheme, in return for a fee, the Treasury provides eligible institutions with insurance against credit losses on risky assets, such as soured commercial property loans.
The scheme aimed to remove uncertainty about banks' previous investments, giving investors and deposit-ors confidence in its future exposure to bad debts.
To participate, deposit-taking institutions with more than 25bn of eligible assets had to prove:
n they were adequately capitalised and funded or have a realistic plan for accessing this;
n have a sustainable business model and plan;
n have a clear, broad-based and sustainable funding profile, sources and mix;
n have a credible senior management team with the ability to deliver the business plan.
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Saturday 11 February 2012
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