No crumb of comfort for Lloyds as analysts balk at fundraising plan

Published on 02/09/2009 21:05

INVESTORS in the City have little appetite to support a potential £10 billion fundraising by Lloyds Banking Group, as the bank seeks ways to reduce its reliance on the government's Asset Protection Scheme (APS).

Rumours detailing how the bank will raise cash to boost its balance sheet have been circulating in the City as the group tries to undertake secret negotiations with the Treasury and the European Commission on the terms of its participation in the APS.

But analysts yesterday warned investors against buying into the bank and called for the bank to be totally nationalised.

As investor confidence has recovered in recent weeks, the chance of returning to shareholders and other investors seemed a possibility.

However, conflicting reports have emerged on the latest rumours, with some claiming that "important City shareholders" had backed a plan to raise 10bn, while others denied Lloyds had approached shareholders at all.

Lloyds refuses to comment on the speculation except to re-issue a statement that it is "working with the Treasury to finalise the terms of our intended participation in the APS".

The bank has earmarked 260bn worth of toxic assets for the government insurance scheme, but it is thought that chief executive Eric Daniels would like to see this reduced to 130bn and thus reduce the 15.6bn of fees to take part in the scheme. The insurance fee could only be paid if Lloyds allowed the government to buy new shares in the company, which would take the taxpayer's stake in the bank to above 60 per cent.

Reducing its participation also means there would be less pressure on the bank from the EU to sell its retail banking assets.

Most of the billions of pounds of writedowns that Lloyds has disclosed in the last nine months are linked to toxic loans granted by HBOS before it was taken over by Lloyds last autumn. Recently Lloyds reported a 4bn pre-tax loss, with assets from troubled HBOS accounting for about 80 per cent of the group's 14bn pound bad loan provisions.

Justin Urquhart Stewart, director and co-founder of Seven Investment Management, said the best option would be for the government – which currently owns a 43 per cent stake in Lloyds – to take it into complete ownership.

He said investors in either shares or bonds expecting an upturn in its performance were "flying in the face in reality".

Although the bank recently sold its investment management firm Insight for 235 million, and the group is in talks with investors to sell off an estimated 4bn worth of assets and liabilities in the HBOS Corporate portfolio, it is unclear how this would reduce the bank's assets insured by the APS from 260bn to 130bn.

Further asset sell-offs – either to raise further capital or to appease EU demands – could see their values reduced as buyers spotted a panic sale.

"A bond issue will at least allow them to put part of it into the government scheme. Otherwise they will have to start selling assets," said Urquhart Stewart.