British Government Takes Controlling Stake In Lloyds Banking

British government takes controlling stake in Lloyds Banking Group JENNIFER QUINN
LONDON _ The British government has become the majority shareholder in Lloyds Banking Group PLC in exchange for insuring more than 260 billion pounds in toxic assets, the bank said Saturday.

The deal means the government's stake in Britain's third-largest bank will surge from 43.5 per cent currently to at least 65 per cent and possibly as high as 77 per cent.

As a condition for the deal, Lloyds promised to increase lending _ primarily to businesses _ by 28 billion pounds over the next two years.

Eric Daniels, the group's chief executive, said in a statement that the deal ``substantially reduces the risk profile of the group's balance sheet. Our significantly enhanced capital position will ensure that the group can weather the severest of economic downturns and emerge strongly when the economy recovers.''

Lloyds is the second bank to take part in the government's asset protection program after Royal Bank of Scotland PLC last month announced it would ask the state to insure 325 billion pounds of risky assets.

Lloyds was forced to turn to the program, which the government hopes will stabilize the country's shaky banking system, after sustaining heavy losses from its January takeover of HBOS.

That deal had already led to a 17-billion pound bailout, which saw the government pick up its current stake, and the bank said that more than 80 per cent of the 260 billion pounds to be insured comes from HBOS' lending books.

Under the asset protection program, banks pay a fee to have bad loans underwritten by the government, giving them more flexibility to lend to individuals and businesses.

Lloyds said its assets covered are expected to include some 74 billion pounds in residential mortgages, 18 billion pounds in unsecured personal loans, and 151 billion pounds in corporate and commercial loans.

Lloyds has negotiated a 15.6 billion-pound fee to be paid over seven years. The money will be used by the Treasury to subscribe to the issue in nonvoting ``B'' shares.

Stephen Timms, the Treasury's chief secretary, told the BBC there was uncertainty over the true value of the assets, but that he believed the deal would help position Lloyds for the future as a strong financial institution.

He also said the ultimate cost to the taxpayer was unclear.

``What we have seen elsewhere where similar arrangements have been made is that some fraction of the total value of the assets held is ultimately a cost to the taxpayers, but it will be some years before the total cost becomes clear,'' Timms said.

The government can convert its nonvoting holding into ordinary shares at a cost of 115 pence _ nearly three times the 42 pence closing price on Friday.

If it chose to do this, and took up the full 4 billion pounds conversion of preferential into voting shares, then the taxpayer would own 77 per cent of ordinary shares, though Lloyds said that the government had agreed to restrict its voting rights to 75 per cent.

The deal puts further pressure on Daniels and chairman Victor Blank, who agreed the ill-fated deal to buy HBOS, which earlier this month reported a full-year loss of 7.5 billion pounds, compared with a profit of 4.05 billion in the previous year. The group's Lloyds TSB unit reported an 819 million-pound profit.

When Lloyds rescued HBOS and the government picked up its initial stake, the bank said it did not want the government to take a majority investment, regarding the state as simply another investor.

Copyright © 2009 The Canadian Press LONDON _ The British government has become the majority shareholder in Lloyds Banking Group PLC in exchange for insuring more than 260 billion pounds in toxic assets, the bank said Saturday.