Contrasting fortunes

3 November 2009 By George Hay Follow @gfhay

In February, the UK banks seemed as bad as each other both were staring at state insurance and higher government ownership. This fate has indeed now befallen RBS, which has received a further smack from Brussels for good measure. But for Lloyds, the future looks brighter.

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The UK government has unveiled the terms for Royal Bank of Scotland and Lloyds Banking Group, regarding their participation in its asset insurance scheme.

Lloyds is to exit the scheme entirely and pay a fee of £2.5bn to do so.

RBS will enter the scheme but put in £280bn of assets to be protected instead of the originally intended £325bn. RBS will be responsible for the first £38.7bn of losses on assets in the scheme, rather than £19.5bn. Instead of paying a £6.5bn upfront fee and losing the rights to deferred tax assets (worth about £9bn£11bn), the bank will pay an annual fee of £700m in 200911, falling to £500m afterwards. RBS can pull out of the scheme at any time but if it does the sum of its insurance fees thus far must be £2.5bn. Hence if it was in the scheme for three years it would still have to pay an extra £400m.

RBS will issue £25.5bn in new nonvoting Bshares to the state at 50p. It will also pay a 4% fee, or £320m a year, to receive contingent capital of £8bn. This will convert into ordinary equity if RBS's core Tier 1 capital ratio falls below 5%.

Lloyds will raise £13.5bn in a rights issue whose price will be determined on 24 November. It will also raise £7.5bn by swapping hybrid capital for contingent capital which converts into ordinary equity if its core Tier 1 ratio falls below 5%. It will pay hybrid debt holders a coupon that will on average be 167 basis points higher than what they currently receive.

RBS will have to divest parts of its UK branch and corporate business, RBS Insurance, Global Merchant Services and its stake in RBS Sempra Commodities over the next four years. Lloyds will dispose of 600 branches, a 4.6% share of its personal current accounts and 19% of the group's mortgage business.

By 11.45am, RBS shares had fallen 7% to 36p. Lloyds shares were flat at 84p, after initially rising 4%.

RBS press release

UK government press release

Lloyds proposed alternative to GAPS/capital raising

Lloyds interim management statement

Lloyds capital raising exchange offer and publication of exchange offer memorandum

Lloyds hybrid capital securities

Context News

The UK government has unveiled the terms for Royal Bank of Scotland and Lloyds Banking Group, regarding their participation in its asset insurance scheme.

Lloyds is to exit the scheme entirely and pay a fee of £2.5bn to do so.

By 11.45am, RBS shares had fallen 7% to 36p. Lloyds shares were flat at 84p, after initially rising 4%.

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