Surface Ripples

Selling The Silver

As expected, Lloyds Banking Group and RBS are having to re-structure at the behest of the EU Commission in order to qualify for state aid.

The way that the Times portrays this is that employees earning over GBP39,000 a year will forego bonus payments in 2009, whilst the boards will defer bonuses until 2012. However, the key point that people seem to have missed (or elected not to mention) is that the British taxpayer is again propping up two institutions that the EU Commission did nothing to help in their time of need, but insists on dismembering at additional cost now that the "immediate" crisis is over. Even before Lloyds and HBOS got together, it was known that there would be "competition issues", but is this the best time to break them up?

Here are some points to think about. Firstly The UK economy is still fragile. To start dismembering RBS and HBOS will cost time, money and effort that could be more effectively used in keeping these banks going and supporting their business customers. Now management will be distracted again from their job of running the businesses profitably for their shareholders (in this case, the UK taxpayer) and their customers as they dress up the businesses identified for sale. This is only likely to prolong the agony. The report suggests that the Chancellor will have to add a further GBP13billion to fund purchases of shares in both institutions - where will this come from?

Secondly: there is some question as to the availability of buyers out there. Even if there are buyers, they will be looking for the proverbial "knock-down" price as this is essentially a fire-sale. Is this really in the best interests of RBS/LBG and the UK taxpayer? No doubt, the price has to be low enough to attract buyers and to reduce the potential burden on the UK taxpayer, but let's not throw the proverbial baby out with the bathwater.

Thirdly: whilst the transfer goes ahead, there will be continuing uncertainty for both the customers and staff of the bits being sold. Staff at Cheltenham & Gloucester have already had an on-again, off-again ride this year, and this will serve only to further lower morale and commitment. Existing mortgage and other customers will also face uncertainty at a critical time for them until they know whether their business will continue as before.

Fourth: there will have to be a "shakedown" period as the new owners come to grips with what they have bought and introduce "their way" of doing things (including their management who may/may not know anything about managing a UK business). On the positive side, they may bring in newer, better ways of doing things that will benefit customers and staff in the long run.

Alastair Darling says that he would like to see "more competition" on the street - a laudable aspiration, but in a way it was too much competition that was partly to blame for the current state of affairs with too many lenders with too many products chasing a finite borrowing market. Any new competition will, in any case, be unlikely to surface until at least one year from when the disposals are made for the reasons stated above.

We should look at this not from the point of objecting to the re-structuring, just to its timing. The EU Commission can already point to ING as an example of another institution playing the game, but again, this has happened more quickly than forecast. The question has to be asked, is the EU acting in the best interests of customers, governments and shareholders, or does it need to review the situation and set more pragmatic guidelines?

What LBG Will Sell:
Lloyds branches in Scotland
Cheltenham & Gloucester sites
Intelligent Finance online business

What LBG Will Get:
Additional GBP5.7billion (on top of the GBP17billion already received)

Other Plans:
GBP13.5billion rights issue as part of a GBP21billion fundraising plan (thus avoiding using the Asset Protection Scheme which would increase the UK taxpayer's 43% stake in LBG).
Will raise additional funds by swapping GBP7.7billion in existing debt into contingent capital

Other Fees/Penalties:
Bonuses deferred.
GBP2.5 billion penalty for not taking part in the Asset Protection Scheme


What RBS Will Sell:
Branch network in England and Wales
NatWest sites in Scotland.
Global merchant services business
RBS Sempra Commodities.
Churchill Insurance
Direct Line Insurance

What RBS Will Get:
Additional GBP25.5billion (taxpayers' stake increases from 72% to 84%)
GBP8billion in contingency funding
GBP282billion of bad loans into the Asset Protection Scheme,

Other Fees/Penalties:
Bonuses deferred
Fee for joining the APS reduced from an upfront GBP6.5billion to GBP700million/year for three years and GBP500million thereafter (reduction of £2.5 billion)
RBS will bear the first GBP60billion for any first losses instead of GBP42billion

Other Plans:
Nil

Labels: Financial

posted by William Martin @ 19:20