Pressure growing on Lloyds to offload Widows

Published on Monday 25 January 2010 20:38

LLOYDS Banking Group was facing further pressure to offload assets yesterday as concerns over new banking regulations posed more questions about the future of its Scottish Widows subsidiary.

• Picture: PA

Banking analysts at Barclays Capital said that proposed changes to banking regulations, known as Basel III, would adversely impact on Lloyds' balance sheet by as much as 18.1 billion.

Analyst Tom Rayner estimates that even a 12bn fall in Lloyds' capital is possible, leaving the bank needing to find an additional 3.6bn to meet the regulator's demands.

The Basel proposals are currently part of a consultation document, with new regulations due to come into force in 2012.

As well as significant changes to the way banks account for risky assets on their balance sheet, the current proposals would also change the way banks account for subsidiary units such as life insurance or fund management businesses.

According to Barclays' analysis, 5.8bn in Lloyds' life assurance business – currently included in the capital of the overall group – would have to be shouldered entirely by Scottish Widows.

Rayner wrote that selling the Edinburgh-based unit – even at a loss of up to 2bn – would boost Lloyds' capital position by a level "which appears sufficient to close the deficit".

The note also raised the possibility of a further cash call.

"While raising fresh equity would be another way to deal with any deficit, selling the life assurance business would be a further potential solution given that it is this business that is most impacted by the potential regulatory changes."

Yesterday's note was the latest shot in a growing argument on the impact of the Basel proposals.

Last week Jonathan Pierce at Credit Suisse issued a report warning that Barclays may be forced to raise 17bn to cover a fall in its capital levels because of the new proposals.

Pierce argued that Barclays could avoid a cash call, but said it would require a "tightening" of the business before the new regulations come into force. This could include selling its 50 per cent stake in investment management giant Blackrock or cutting its recently reinstated dividend.

Opinion among analysts about the impact of Basel varies widely.

Analysts at Execution said in December that while the proposals were expected to hit Lloyds' balance sheet, "we continue to regard the bank as overcapitalised" following its 13.5bn rights issue.

Exane BNP Paribas also said last month that it was unlikely that Lloyds would need to conduct a further cash call or be forced to sell Scottish Widows.

Even Barclays Capital's own Rayner wrote that the potential impact of Basel III was "highly subjective", with the current proposals part of a consultative document.

A spokeswoman for Lloyds said the company did not comment on individual analyst research.

Other bank sources have said that while the industry is watching the development of the proposals very closely, substantial changes are expected before they are brought into force.