Lloyds Drops as UBS Cuts Rating on Concern of Capital Raising

Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc fell in London trading after UBS AG analysts reduced their rating on the stocks, citing concern that U.K. lenders may be forced by regulators to raise more capital.

Lloyds slid 2.9 percent to 38.8 pence by 10:15 a.m. in London trading, the biggest decliner in the Bloomberg Europe Banks and Financial Services Index. Edinburgh-based RBS slid 2.5 percent to 259.8 pence, the second-biggest faller in the index. The companies are Britain’s two-biggest taxpayer-owned lenders.

“The U.K. banks have not heeded exhortations to raise external equity in our view as they simply do not need it,” UBS analysts led by John-Paul Crutchley wrote in a note to clients today as they reduced their rating on the firms to hold from buy. “However, we see a risk that the market will focus the absolute equity level requirement as leading to a risk of new equity issuance, to the detriment of current equity value.”

Banks may need to sell new shares to raise capital while they increase lending and remove bad loans and non-core assets from their balance sheets, Andrew Bailey, head of prudential regulation at the U.K.’s Financial Services Authority, said in an opinion piece published in the Sunday Times on Sept. 30. The regulator has changed the guidance it gives to banks on capital needs over the past two months, Bailey wrote.

“Banks are being asked to hold absolute levels of equity, rather than equity being expressed as a proportion of risk assets or total assets,” UBS said. “This is a profound change and puts the U.K. seemingly at odds with all other major economies.”

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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