Bailout bill to taxpayer eases but risks remain

A report by the National Audit Office (NAO) also warned of major risks to the sector despite the position of state-owned banks stabilising this year.

The bill for rescuing and then continuing to support the banking sector dropped to 512bn, a significant reduction from the 955bn seen at the height of the financial crisis, the NAO said yesterday. Taxpayers still own 41 per cent of Lloyds Banking Group, which bought Halifax Bank of Scotland, and 83 per cent of Royal Bank of Scotland. Mortgage lender Northern Rock and the loan book of Bradford & Bingley are entirely nationalised.

The taxpayer outlay has eased after the repayment and closure of some bank support schemes, as well as the removal of guarantees – such as those offered to Northern Rock depositors.

However, the Government is still on the hook for support including 131bn to RBS under the toxic asset insurance scheme, more than 70bn for its stakes in part-nationalised players and 22bn in loans to Northern Rock.

The NAO said while the Government would still be paying for the support for many years, the most likely scenario was that there would be no overall loss on the main guarantees, such as the asset protection scheme for RBS. But it was unclear if the taxpayer would recoup its losses on stakes held in RBS and Lloyds – currently in the red to the tune of 12.5bn.

Amyas Morse, head of the NAO, said: "The most likely scenario is that the taxpayer will not pay out on the guarantees.

"Optimism on this score should be tempered, however, with the realisation that the risk of further shocks to the financial markets and of significant loss to the taxpayer has not gone away."

Lloyds, which was saddled with heavy losses after buying HBOS at the height of the crisis, reported a 1.6bn profit for the first half of 2010 – its first profit in two years. However it has axed more than 16,000 jobs across the two banks, of which 12 per cent have been compulsory redundancies,.

RBS reported first-half profits of 1.1bn but provoked anger in September with plans to shed more than 1,000 jobs in Yorkshire as part of a nationwide cull of 3,500 roles. About a third of the job losses follow its enforced sale of 318 branches to rival Santander, which also bought B&B's 197-strong branch network in 2008.

The NAO report confirmed that RBS and Lloyds have not recovered from the financial crisis at the same pace as their competitors, with shares still at a paper loss. It also revealed that despite an overall reduction in support, the Government is paying 5bn a year in interest on borrowings used to fund the bail-out support. It took out a further 7bn in net debt this year to finance banks, at 124bn, after interest on borrowings and money forked out in the restructuring of nationalised Northern Rock.

Interest on bail-out borrowings is 11 per cent of the total interest on public sector net debt, according to the NAO, although it added it was largely being offset by fees and interest received from banks in return for support.

The NAO's conclusion offers welcome cheer, given that the Government had feared the total cost of supporting the banks stood at between 20bn and 50bn in 2009. However, the eventual taxpayer bill is dependent on the Government offloading its stakes in RBS and Lloyds and recouping loans made to the sector.

The NAO also warned the Government may be called on to pump more cash into the banks, given the upcoming challenges of new capital reserve requirements. It said strong banks that meet the new European requirements early may use this to secure competitive advantage, which could force the state to defend taxpayer value in banks, such as by possible future capital injections.

Sell-off faces obstacles

It will not be easy for the Government to sell its stake, given that the total value is more than six times greater than the largest European sale of already listed shares, the National Audit Office said. The NAO said the

shares will need to be sold in stages. The Independent Commission on Banking's forthcoming report into competition in the sector could recommend breaking-up Lloyds.