Lloyds Banking 'rights issue' worth backing

Wednesday, 21 October 2009 07:44

A senior fund manager has claimed a rights issue from Lloyds Banking would be worth backing, or at least be a lesser of two evils over the government's asset insurance scheme.

The bank - 43 per cent owned by the government - has been reported to be mulling over a £15 billion rights issue, a record for a British company.

A rights issue would be a way for the lender to avoid a state stake in the bank increasing above the current level - which is a possibility if it takes part in the government's asset protection scheme (APS).

In March, LLoyds Banking stated it was participating in the insurance scheme - covering toxic assets, largely held after the rushed merger with HBOS.

However, the Treasury and the lender have been hammering out the fine details, and following a review of assets LLoyds is looking to edge away. The view is the lender's position has much improved since the start of the year, and last month it revealed it was looking at alternatives.

A further spanner in the works has been European legislation on state aid, which could see LLoyds Banking to sell off some assets. This week it sold off its fund management arm for £35.4 million and last week it sold loss-making Halifax Estate Agency for £1 - as it aims to focus on its core business.

A rights issue is being seen as one route out of the quagmire.

Paul Mumford, senior fund manager at Cavendish Asset Management, said a right issue "represents the lesser of two evils for shareholders, who should back the bank in its bid to escape the Asset Protection Scheme".

He added: "Looking at the performance of banks such as Barclays, which avoided government protection, it is clear that the market recognises there is greater upside to be enjoyed by an independent banking sector.

"The problem of entering the APS is that Lloyds shareholders will be left with all the downside but none of the upside should the bank not sustain worst-scenario levels of losses. Lloyds would pay a massive premium that the market now believes could well exceed the extent of insured losses, given the more benign economic picture emerging.

"Tomorrow's rewards would be enjoyed by the taxpayer at the expense of the battered shareholder."

He explained the only way out of the APS would be for the bank to bolster its capital position beyond any level that seems necessary.

"If Lloyds escapes the net of the APS, it will probably be in no worse a financial position than if it had gone into the scheme. But, crucially, if losses are at the lower level currently expected, Lloyds will retain the excess capital," Mr Mumford said.

"In due course, that excess could well give Lloyds the route to reduce the government's holding by buying out all or part of its stake."

Mr Mumford also suggested Royal Bank of Scotland may try to follow LLoyds Banking's example.

"While investors will probably find the Lloyds deal palatable, further support for RBS is far less compelling," he said.

"The combination of the government's strong interest in the bank, its exposure to complex financial products, and its problem lending book, would make it a much harder deal for the market to swallow, not least as thinking is not yet frothy.".

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