Pressure on Brown as Lloyds 'to lose £26bn'

Published on Monday 16 February 2009 20:51

LLOYDS Banking Group could suffer additional losses of £16 billion, analysts warned yesterday as they downgraded the firm's credit rating.

The withdrawal of the triple-A rating by Moody's Investor Services follows the banking group's profit warning of a 10 billion loss.

But according to analysts, Friday's predictions, blamed on the risky acquisition of Halifax Bank of Scotland (HBOS) by Lloyds, will be just the beginning of even deeper losses during the downturn.

Elisabeth Rudman, a senior credit officer at Moody's, said the downgraded ratings for Lloyds and its subsidiaries reflected the higher level of risk exposures within HBOS.

"The current rating level incorporates the potential for further losses of up to 16 billion on top of the 10 billion announced," she said.

"Given the speed of deterioration within the UK economy, and the risks within the HBOS – and to a much lesser extent, Lloyds' books – our own stress scenarios indicate there is a reasonable possibility of this level of losses through the downturn."

The acquisition of HBOS by Lloyds during the economic downturn would add to the difficulties, she said.

Shareholders were taken on a rollercoaster ride yesterday, as the Lloyds Banking Group started the day with a 20 per cent slide before recovering at eight per cent down on the day.

Questions were also resurrected over Gordon Brown's role in the merger talks. The suggestion that the government put pressure on Lloyds to take over HBOS more speedily was underscored by reports at the time of the talks last September.

It will add to pressure on Mr Brown who, as Chancellor, was responsible for regulation reforms of the City, and will serve as ammunition for his political opponents who are striving to blame the downturn on the Prime Minister.

Stewart Hosie, the SNP's Treasury spokesman, said it was clear that the government held out the prospect of recapitalisation to drive the merger. "By making the recapitalisation plan contingent on the merger, that put the maximum pressure on Lloyds and HBOS to accede," he said.

A blog entry on 23 September by the BBC's business editor and Mr Brown's biographer, Robert Peston, suggested that Mr Brown had urged Lloyds chairman Sir Victor Blank to "end the uncertainty" hanging over HBOS.

Meanwhile, analysts warned that the taxpayers' stake in the bank could rise from 42 per cent to 76 per cent if new shares were underwritten by the government.

Yesterday, Downing Street refused to rule out nationalisation of Lloyds but insisted there were no plans under "active consideration".

Mr Brown's official spokesman also stressed that the idea of the merger had been raised by the banks themselves last year.

"The Prime Minister remains of the view that the merger is in the wider interest of the stability of the UK financial system and I think you have to ask yourself what would the alternative have been had Lloyds not taken over HBOS at the time."

However the Liberal Democrats' Treasury spokesman, Vince Cable, said the government was in denial about the inevitability of nationalisation.

"This is a U-turn waiting to happen," he said. "With Lloyds continuing to be dragged down by the weight of HBOS's losses, it is highly irresponsible to not even have nationalisation as an option.

"It is out of the question that Lloyds will be allowed to go under, so the government must be honest in its assessment that the total nationalisation of the bank is a distinct possibility. It was always clear that the HBOS takeover was a serious problem for long-term competition and for the stability of Lloyds."

Alex Potter, an analyst at Collins Stewart, said that the prospect of Lloyds requiring further capital could not be ruled out.

IN NUMBERS

MORE than eight out of ten Britons think the banking system needs to be reformed, a survey has found.

About 37 per cent say they have lost trust in the banks to act in the best interests of the economy, while 84 per cent think the banking system needs to be changed, according to the consumer group Which?.

A further 21 per cent of people no longer trust banks to keep their money safe, and 38 per cent think the sector does not offer the best returns.

Bank customers lose trust in management and call for a change in national institutions

MORE than eight out of ten Britons think the banking system needs to be reformed, a survey has found.

About 37 per cent of people said they had lost trust in the banks to act in the best interests of the economy, while 84 per cent think the banking system needs to be changed, according to the consumer group Which?

A further 21 per cent of people no longer trust banks to keep their money safe, and 38 per cent think the sector does not offer the best returns on their cash.

The research shows how public trust in the sector has fallen as a result of the credit crunch and the nationalisation and part-nationalisation of a number of high-street banks.

Nine out of ten consumers said that they thought banks had encouraged excessive borrowing, and 87 per cent also thought the sector should do more to ensure that customers could afford to repay loans before they agreed them.

Fewer than a third of people trusted their bank to be sympathetic if they ran into financial difficulties.

Doug Taylor, a Which? personal finance campaigner, said: "The sword of Damocles is hanging over the banking sector. The message is loud and clear – people think the banking system needs to be reformed.

"Surely, with such a groundswell of public feeling, it's time that the banks, government and regulators sat up and took note? People are angry and they need answers fast."

Meanwhile, research released by the Building Societies Association showed that the majority of mutual customers were happy with the sector.

About 74 per cent of people who had a mortgage with a building society said they were either extremely or very satisfied, compared with 63 per cent of people at other mortgage-providers. Meanwhile, 67 per cent of savers with mutuals were happy, compared with 53 per cent who held their money with other providers.

A further 69 per cent of building society customers trusted the sector to keep their money safe, and 68 per cent thought they were treated fairly as customers.

&#149 Which? questioned 3,481 people during January, and GfK NOP questioned 5,000 people between 16 to 21 October for the Building Societies Association.