RBS shares plunge as City reckons Lloyds is bank settlement winner

Published on Tuesday 3 November 2009 20:00

THE City responded to the restructuring of the banks yesterday by hammering Royal Bank shares and buying Lloyds, in what was seen as a poor outcome for RBS and a less hostile settlement for its rival.

While Lloyds closed top of the FTSE-100 risers' list, RBS was the worst performer, leaving chief executive Stephen Hester clearly unhappy that his ability to revive the bank's fortunes had been made more difficult by the European Commission verdict.

Shares in Royal Bank of Scotland shed 7 per cent, while Lloyds put on 2.7 per cent.

Hester told The Scotsman he was "totally comfortable" with the sale of branches in England and Wales that would improve competitiveness, but he warned that "the other disposals – insurance, investment banking and commodities trading – will reduce and not increase competition", as they would be acquired by rivals.

Keith Bowman, banking analyst at broker Hargreaves Lansdown, said: "The EU proposals are tighter on RBS than Lloyds. There does seem to have been a greater weight of disappointment in the City on RBS as a result.

"In addition, the Royal has been left with a very significant government economic stake in the bank of well over 80 per cent, while Lloyds has kept beneath the magic 50 per cent level by not joining the government's asset protection scheme.

"That could affect sentiment to the respective shares going forward."

The two banks have to sell off businesses equating to 10 per cent of the UK retail banking market.

Lloyds, which said yesterday it avoided harsher penalties by staying out of the government's asset protection scheme, confirmed it would sell branches of mortgage business Cheltenham & Gloucester, as well as its Intelligent Finance and the TSB brand and branches.

RBS will be forced to sell a handful of NatWest branches in Scotland, more than 300 RBS-branded branches in England and Wales, along with RBS Insurance, Britain's largest car insurer. It will also sell Global Merchant Services and RBS Sempra Commodities.

Simon Willis at NCB Stockbrokers said of the deal: "Lloyds definitely seems to have got off lightly on asset disposals. Its major rights issue is also priced to go."

To sidestep the APS, Lloyds confirmed market expectations it would raise 21 billion via a 13.5bn rights issue and by swapping 7.5bn in existing debt into contingent capital, which will support its capital requirements.

The fully underwritten issue, the largest since HSBC's cash call earlier this year, will be priced on 24 November at the higher of either 15p or a 38-42 per cent discount to the ex-rights price.

That estimated ex-rights price will only be known two days before the EGM to approve the Lloyds' capital-raising.

One analyst said the low 15p level "sets a floor against any big tumble in the Lloyds' share price" following significant "shorting" of previous rights issues in the banking sector.