Terry Murden: Bank restructuring kicks off in atmosphere of political vengeance

Published on Saturday 31 October 2009 13:55

THE new shape of British banking could begin to emerge this week with a record rights issue on the cards, and plans for some radical changes of ownership.

With Lloyds Banking Group poised to announce a cash call of up to 13 billion, the bank will feel that it is beginning to remove the uncertainty that has surrounded it since the controversial tie-up with HBOS.

In the early spring, Lloyds was being told by the City that it would have to submit to the government's asset protection scheme (Gaps) – the insurance guarantee for all those toxic debts.

Now it looks like Eric Daniels, Lloyds' much-criticised chief executive, has managed to keep the bank out of Gaps, but at a cost.

The bank could make an announcement on its rights issue on Wednesday, a process that will cost the taxpayer 5bn as the government buys new shares to maintain its 43 per cent holding. But shoring up the bank's balance sheet will not end there.

The asset disposal scheme is now taking shape after a few scare stories that appear to have been wide of the mark. The rumoured disposal of HBOS was nothing more than that. But the latest scenario – the sale of online bank Intelligent Finance, mortgage lender Cheltenham & Gloucester and 185 branches of Lloyds TSB Scotland – looks like the real deal.

It would be forced to sell the former TSB branches while retaining the 300-strong Bank of Scotland network. Vague rumours that it favours this arrangement because BoS prints its own banknotes look to be wide of the mark.

Daniels may get some kudos from seeing his signature on a 20 note, but the real reason he wants to keep the BoS operation is because it is a far more important part of the combined business, with a substantially greater market share than Lloyds TSB Scotland.

The bigger question is how far the disposal of the branch network would go. Branches are served by back-office functions: products, services and systems. So the knock-on effects are yet to be calculated.

But given the abject state the banks were in only a few months ago, their prospects are looking a little brighter. The sale of assets may be disruptive but would mean a continuation of businesses and jobs. Under state aid rules, a seller would be given up to five years to complete any divestment, so none of this is likely to happen any time soon.

The disposal programme for Royal Bank of Scotland is also becoming clearer. It is expected to scale back its investment banking operations and its business banking through the sale of 300-plus branches down south as part of the government's demand that it reduces its balance sheet. But the likelihood that it will be told to sell its insurance business – Direct Line, Churchill, Green Flag and Privilege – which it has already tried and failed to sell, carries a heavy suspicion the bank is getting an extra kicking when it is already down. Political vengeance still hangs heavily in the Westminster air.

25bn boost likely for struggling economy

THE UK economy's refusal to move out of recession in the last quarter has clearly raised a few hackles and those able to offer another stimulus are likely to unleash some further action this week.

There is enough anecdotal evidence that companies are continuing to find it difficult to raise capital and that, without it, the UK economic recovery will be held back.

It is therefore becoming increasingly likely that the Bank of England's Monetary Policy Committee will this week sanction up to another 50 billion be pumped into the economy through the quantitative easing programme.

Economists have told Scotland on Sunday that the MPC could be persuaded to go beyond the 200bn that Bank governor Mervyn King and committee member David Miles demanded at the MPC's August meeting.

The QE programme is aimed at preventing deflation and providing greater liquidity in the economy.

So will it happen? Spencer Dale is another member of the committee who is seen as a possible supporter of King and Miles, following comments he made recently.

Paul Tucker, deputy governor, told me in an interview a couple of weeks ago that if it was deemed necessary then the MPC would inject more money into the economy.

That's four of the nine-member committee, so a couple more could do it.

So will it work? Well, that's another matter.