Lloyds Banking Group shares slumped another 15% this morning, as investors turned their noses up at its latest deal with the Government. Announced on Saturday, this will see the taxpayer guarantee about £260bn of Lloyds’s dodgy loans, in exchange for 65% of the bank's voting shares (throw in the non-voting shares too, and our stake is actually more like 77%) - much to the chagrin of Lloyds shareholders, who are hopping mad about the bank’s rapid fall from grace since the HBOS takeover (some might even sue). And this has affected prices across the sector, dragging the benchmark FTSE 100 index to a new six-year low of 3460 points...
The £260bn of assets that Lloyds is putting into the Government’s Asset Protection Scheme include £74bn of residential mortgages and about £150bn of corporate and commercial loans. Lloyds will have to cough up the first £25bn of any losses, plus 10% of any further losses, while the Treasury will cover the rest. For this privilege, Lloyds is shelling out a pretty steep-sounding £15.6bn fee, which the Government will convert into non-voting 'B shares'. It’s also converting its expensive preference shares (which would have cost Lloyds nearly £500m a year) into ordinary shares: that increases the Government’s voting stake, but it does mean Lloyds might be able to pay out a dividend next year (which they weren’t allowed to before).
So it’s all a bit embarrassing for Lloyds chairman Sir Victor Blank and CEO Eric Daniels, particularly since 83% of the dodgy assets being placed in the scheme are from the HBOS lending book. They’ll argue that this validates their relatively conservative approach – but as the architects of the HBOS takeover, they’re the ones who have foisted all this toxic mess onto their own shareholders. As both come under pressure to quit, Daniels has been trying to put a brave face on things, and talking about the bank's ‘significantly enhanced capital position’. But the best he could offer was that it was ‘an appropriate deal for our shareholders’. Not exactly language guaranteed to warm the coldest of hearts...
Barclays also plummeted 10% this morning, as it prepares to open its own negotiations with the Government. The bank has so far steered clear of state support – but now that the Treasury is back-stopping the losses from some of its biggest rivals, it’s been forced to explore the option of following suit. Investors are clearly worried that Barclays will be pushed reluctantly into a deal that will come with too many strings attached. Oh, and HSBC shares are also down, ahead of its rights issue.
In other words, it's more carnage in the banking sector - and it's dragged the FTSE 100 down below the 3500 mark this morning. The Government may have put a floor on Lloyds’ losses, but it looks as though there could still be plenty more pain to come for banking shareholders...
In today's bulletin:
FTSE hits six-year low as Lloyds sinks again
Bovis Homes cheers despite big loss
MT Special: Ted Turner on the new Depression
Costa gets tongues wagging with £10m taster
Sugaring the pill on apprentices