Nov. 3 (Bloomberg) -- Lloyds Banking Group Plc plans to raise 21 billion pounds ($34 billion) and deny the government majority control of the country’s largest mortgage lender.

The bank will raise 13.5 billion pounds in a rights offering, and 7.5 billion pounds in a bond exchange, the London-based bank said in a statement today.

The lender will not take part in the government’s Asset Protection Scheme, which would have increased the British government’s stake to about 62 percent and cost the bank 15.6 billion pounds in fees. Instead, the bank will pay the government 2.5 billion pounds for having had what the Treasury called the “implicit protection” of the plan for the past eight months.

“These proposals provide a significantly more attractive, market-based alternative to participating in” the APS, Lloyds Chairman Win Bischoff said in the statement. The plan will “offer superior economic value to shareholders.”

Lloyds gained 2.7 percent to 87.33 pence, valuing the bank at 23.8 billion pounds. The FSTE 350 Bank Index fell by 2.56 percent.

Lloyds, 43 percent government-owned, will sell a retail banking unit with a 4.6 percent share of the U.K. current account market and 19 percent of the group’s mortgage balances to gain European Union approval for last year’s 17 billion- pound bailout package.

Unit Sales

Lloyds will also divest Cheltenham & Gloucester-branded accounts and mortgages, its Intelligent Finance online unit, some Lloyds TSB branches in England & Wales and the TSB brand within four years, the company said.

The government will invest an additional 5.8 billion pounds by taking up its rights in the Lloyds share sale. The rights offering will surpass the 12.5 billion-pound share sale by HSBC Holdings Plc in March.

The bank said today that the pace of overall impairments slowed in the third quarter.

“As a result, we continue to expect impairments to fall significantly in the second half of 2009, compared with the first half of the year,” the bank said today.

Lloyds said the charges reached 18.6 billion pounds in the third quarter of 2009 compared with charges of 13.4 billion pounds in the first six months.

The bank saw a “significant reduction” in the impairment run-rate in the third quarter, it said in the statement.

Remaining within the APS would have had a “materially negative impact on the group,” because the EU would have required more asset sales, Chief Executive Officer Eric Daniels told reporters on a conference call today.

“Self-help is the best form of help,” said Bischoff on the conference call. The capital-raising plans are “a cost- effective market-based solution,” and are “better than state aid,” he added.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: November 3, 2009 12:00 EST