Lloyds braces for EU order to sell assets

Published on Saturday 26 September 2009 16:17

LLOYDS is this weekend braced for a European competition ruling that may force it to lose up to one-sixth of its share of the British banking market.

Officials in Brussels are expected to demand the bank sells branches and offload parts of its corporate loan book as a condition for receiving state aid.

An announcement will prompt a final showdown between the part-nationalised bank's board and Neelie Kroes, the European competition commissioner. The decision would mean a big shake-up in Lloyds network of Halifax and Bank of Scotland branches and its lending to small businesses due to its dominant position in both sectors.

The move comes as Royal Bank of Scotland puts a majority stake in its asset management business on the market as part of its response to the European Commission's state aid inquiry.

Lloyds' board is now believed to be revisiting a plan to raise up to 25 billion in a rights issue to reduce its exposure to the government's asset protection scheme, which was set up to guarantee its toxic debts.

Reducing its use of the scheme would lessen the need for disposals as it would be absorbing less state aid. If the government pumped more capital into Lloyds it would raise its stake from 43.5 per cent to 65 per cent, a situation that chief executive Eric Daniels is desperate to avoid.

City sources believe it needs at least 16bn and possibly as much as 25bn to bypass the scheme. "If the Treasury takes up its rights, the amount of capital needed from the market is around 9 billion," said one analyst.

Investors have supported Lloyds shares since they hit a low in March. They have risen more than 200 per cent since then and some believe they could rise a further 30 per cent if the bank could get an agreement from the EC to avoid selling key assets. But the bank is believed to be resigned to some form of compromise deal. It has a 31 per cent share of current accounts, 30 per cent of UK mortgages and 22 per cent of lending to small firms.

It has begun merging the Clerical Medical and Scottish Widows businesses that some believe it may also sell. There has been talk of a 4bn to 5bn flotation of the business with Lloyds retaining a significant stake.

However, there is a growing view that the insurance business is a side issue for the EC and that selling it would not resolve the key concerns over Lloyds' share of retail banking.

Royal Bank of Scotland is also considering a rights issue to reduce its exposure to the government guarantee scheme. The benefits of the bank not placing more shares with the government are less significant as it is already 70 per cent state-owned.

It was revealed yesterday that it is to sell a majority stake in its 50bn RBS Asset Management business while retaining the private bank Coutts. A 300m price tag has been put on the part of the business it is offloading.

Information memorandums have been issued to private equity and trade buyers by Morgan Stanley, which is advising on the disposal.