Breakingviews | RBS/Lloyds

Considered view

04 Nov 2009 10:05

Slim pickings

By George Hay

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Context News

Royal Bank of Scotland is to divest several core assets over the next four years, in return for receiving £20bn of state aid last year and placing £282bn of bad assets into the UK government’s asset protection scheme.

The main earnings effect will come from the sale of RBS Insurance, Global Merchant Services and RBS Sempra Commodities, which together provided £1bn of operating profit in 2007.

Other effects on earnings include an annual £700m fee for state insurance, an annual £320m charge for an option to take £8bn of state contingent capital, and a £1.78bn charge to service £25.5bn of state non-voting B shares.

Lloyds will have to pay a post-tax average of an extra 120 basis points, or £90m, in extra coupons to incentivise holders of £7.5bn of hybrid debt to exchange their holdings into convertible instruments that swap into equity if Lloyds’ core Tier 1 capital falls below 5%.

Shareholders in the UK’s two bailed-out banks haven’t been wiped out. But their returns are being savaged by forced disposals plus mammoth, expensive and dilutive capital increases. Lloyds will recover faster. But even by 2012, RBS may be earning barely a few pence a share.

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