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UK banks pay stiff price for fresh assistance Print E-mail
Wednesday, 04 November 2009

By Ronald Fink

A closer look at the terms of further government bailouts of Royal Bank of Scotland and Lloyds Banking Group shows the measures focus more on tough new capital reserve requirements than on a much-ballyhooed break-up.

While the agreement with the UK government calls for both banks to shed branches over the next four years, the banks won't shrink as much as expected, according to an analysis by research firm CreditSights.

"Both banks will have to make significant disposals over the next four years, although they are not as extensive as once feared and hardly amount to the 'break-up' trailed in the press," observed CreditSights analysts Simon Adamson and David Watts in a note published on Tuesday. The analysts noted that the moves will pale in comparison to the more extensive divestitures required of ING by the European Commission.

Still, the analysts estimate the disposals at RBS and Lloyds of many if not most of their branches in England, Scotland and Wales will put a significant crimp in their ability to originate mortgages, and that will in turn reduce the amount of securitization business they're capable of doing.

"The divestiture of these assets throws up questions about the future of the two banks' securitization programs," the analysts noted. And they conceded that the disposals are "not insignificant."

Yet Adamson and Watts contended that the tough new capital reserve requirements are more significant. ING was allowed to continue to pay interest on hybrid securities in return for divesting its insurance business and US branches. But in return for another 25.5 billion pounds from the government, RBS has agreed to defer interest payments on its hybrids for two years, and to accept the first loss on 38.7 billion pounds of 282 billion pounds in assets insured by the government under a so-called "asset protection plan" that it first entered into in March.

Initially, RBS agreed to take the first loss on only 19.5 billion pounds on 325 billion pounds of insured assets.

"On the whole, these revisions are more favorable to the UK government than to RBS," wrote Adamson and Watts.

For its part, Lloyds has managed to escape the insurance plan after agreeing in March to take the first loss on 25 billion pounds of 260 billion pounds in insured assets. But the bank has agreed to issue 13.5 billion pounds in new equity through a rights offering and to exchange 16.5 billion pounds of outstanding hybrids for contingent convertibles that change to equity if its Tier One capital falls below 5 percent of assets.

"Both banks are paying a high price for previous failings," the analysts noted, though they added the measures "should provide them with enough protection to start a genuine recovery."

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