October 14, 2008

Nationalised Banks’ Shares Slump on Fear of Central Control

By Sean Farrell

* RBS, HBOS and Lloyds hit by share sell-off

WHILE STOCK markets around the world soared yesterday as the international authorities battled to get to grips with the credit crisis, there was one sector notably missing out on the rebound. Shares in Britain's three nationalised banks fell heavily as investors shied away from lenders controlled by the Government with restrictions on their freedom to operate.

The announcements by Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB setting out 37bn of share issues to be bought by the Government prompted a sell-off in the shares of all three banks. HBOS suffered particularly badly after admitting the terms of its takeover by Lloyds had been renegotiated in the latter's favour.

RBS will raise 20bn, with HBOS getting 11.5bn and Lloyds asking for 5.5bn, all in a mix of ordinary and preference shares paying a heavy 12 per cent interest rate. RBS's shattered share price fell another 8.4 per cent, Lloyds dropped 14.5 per cent and HBOS closed down 28 per cent.

All the shares fell below or near the prices set for the sales of new ordinary stock to the Government. But investors said that even after the capital raisings are complete the Government's terms could make the banks unattractive investments, especially for their traditional income fund investors.

A fund manager who specialises in financial stocks said: "It is better that something has been done rather than letting Lloyds, HBOS and RBS go bust. In share price terms, I suspect that what we have seen recently will continue. Why would you invest in a non-income generating asset?"

Another fund manager said: "Right now it is difficult to see why you would want to invest. There is very little visibility because of the large burden of fixed-cost preference shares. It is hard to value the equity because it takes quite a long time before you get back to having any earnings to value."

In return for its support, the Government has extracted board representation, curbs to executive pay and a suspension of dividends while it holds the preference shares. The state has also imposed a string of demands such as maintaining mortgage and small-business lending at 2007 levels and restrictions on balance sheet growth.

Ministers believe the pledges, which go much further than the kind of commitments made by the bans last week when Government capital injections were first offered, are crucial in order to restore confidence in the sector. The commitments on mortgage lending, in particular, will help to get banks advancing cash to homebuyers, ministers hope, and help the housing market to recover.

Lloyds TSB announced new terms, hammered out overnight, for its takeover of HBOS. The deal, agreed last month, was called into question repeatedly as HBOS's share price languished far below Lloyds' all-stock offer. Lloyds' implied offer stood at 98p at yesterday's close, with HBOS's shares trading at an 8 per cent discount compared with a discount of up to 50 per cent last week.

Shareholders in all the banks will have the right to buy the new stock before the Government mops it up, but uptake is expected to be low. The massive capital injections into the banks would see the state owning 43.5 per cent of the merged Lloyds TSB and 60 per cent of RBS.

RBS and HBOS will not be allowed to pay cash bonuses to board members this year, with any paid next year in shares. Lloyds is allowed to pay cash bonuses this year, but will instead use shares, reserving the right to remunerate according to "long-term value" next year. Some observers said Lloyds had got better terms from the Government because it had rescued HBOS.

Barclays has opted out of the Government's offer of assistance and instead plans to raise 6.5bn from investors in the market.


Originally published by By Sean Farrell FINANCIAL EDITOR.

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