Missed chances on banking rescues
There are two missed opportunities in the UK banking bail-out. Lloyds TSB (LON:LLOY) has failed to review its terms for rescuing HBoS (LON:HBOS) and the government has failed to review its terms for recapitalising both banks.
The Lloyds offer document and the creation of the Treasury agency to hold its bank investments were announced on the same day – and both are overpaying.
The government’s main mistake in underwriting share issues for these two banks and Royal Bank of Scotland was to price the issues at a small discount to the market price – then to bar the payment of dividends, ensuing the shares went to a large discount that will ensure they are left with the Treasury.
HBoS is issuing shares at 113.6p when its market price is under 100p so the state will end up with a 58 per cent stake. If the state has to take up the full Lloyds placing too, it will have 43 per cent of the combined group.
Yet if it HBoS issued twice as many shares at half the price (thus receiving the same sum) the government could theoretically end up with 73 per cent (better for the taxpayer) but actually, at 72p, the existing shareholders would buy the shares themselves. Or the Arab sheikhs who backed Barclays might have some spare cash to invest. Either way, the state would have to commit less taxpayers’ money and the bank might avoid nationalisation – so being free to resume dividends when it can.
The Treasury would also avoid the huge capital loss of buying £11bn of shares at well above their worth.
Lloyds should also have renegotiated its terms, even though it has already done so twice. Its paper offer values HBoS at about 30p above the market price: cutting the terms would reduce the dilution and leave Lloyds’ existing investors with more of their bank and more reason to subscribe for the shares it has to issue to meet government demands – again keeping the bank off the government balance sheet to the advantage of itself and taxpayers.
Lloyds reckons it can get £1.5bn of synergies from the bid but HBoS’s trading statement – also issued as the Treasury and Lloyds spelt out their terms – shows a horrendous level of “impairments” (the polite term for write-offs).
The mooted rival offer for HBoS, meanwhile, looks like Scotch mist. If any buyer even half seriously thought of bidding they should think again after reading HBoS’s statement.
