Lloyds Sees No Need to Raise Equity Following PRA CallGavin Finch and Howard Mustoe
Lloyds Banking Group Plc and Royal Bank of Scotland Plc, Britain’s two biggest state-owned lenders, won’t have to raise additional equity to help plug a 25 billion-pound ($38 billion) capital shortfall among the country’s banks.
The lenders plan to raise capital required by the Prudential Regulation Authority by shrinking their balance sheets and through other previously announced measures, according to separate statements today. RBS, based in Edinburgh, and London-based Lloyds both said they don’t have any plans to sell contingent capital securities, or CoCos.
The announcements remove another obstacle to Chancellor of the Exchequer George Osborne’s plan to start selling the state’s 39 percent stake in Lloyds and its 81 percent holding in RBS. They are the first British banks to disclose the outcome of talks with the PRA, a unit of the Bank of England, after the financial supervisor ordered the industry in March to plug the shortfall by the end of the year.
“We are pleased with the substantial progress made in the delivery of our customer-focused strategy,” Lloyds Chief Executive Officer Antonio Horta-Osorio said in the statement. “Our strong capital position enables the group to actively support growth and lending in the U.K. economy as well as delivering sustainable results for our shareholders.”
Lloyds advanced 2.4 percent to 62.99 pence at 11:52 a.m. in London. RBS increased 1.6 percent to 347.8 pence.
The PRA said in a statement from London today that Lloyds and RBS have “advanced their plans to a position where disclosure is appropriate.” Talks with other lenders are ongoing and “more information will be provided along with confirmation that, where necessary, banks will take appropriate steps to ensure they meet” capital recommendations, it said.
Britain’s lenders have been selling units and detailing plans to bolster their businesses since Bank of England Governor Mervyn King initially said in November it was concerned that they weren’t holding enough capital.
Lloyds has sold a 20 percent stake in wealth-manager St. James’s Place Plc and is considering a sale of its Scottish Widows Investment Partnership division. RBS said earlier this year it would sell a 25 percent stake in Citizens Financial Group Inc., a U.S. consumer and commercial lender.
Additional requirements will be met through a “strongly capital-generative core business, continued progress in executing the group’s customer focused strategy and further capital accretive non-core disposals,” Lloyds said. RBS plans to plug its capital hole through “management actions relating to reductions in the size of its markets business and non-core assets, as well as the plans for a partial” initial public offering in its Citizens unit.
Spokesmen at Barclays Plc and HSBC Holdings Plc declined to comment.
RBS, Lloyds and Barclays all gained approval from shareholders this year to be able to offer CoCos. The securities convert into equity in the event that the capital of a bank falls below a pre-set level and are designed to protect taxpayers in a financial crisis and avert future bailouts.
RBS said that while the plan “does not call for issuance of contingent capital instruments” it “remains an option.”
Lloyds today reiterated that it expects its fully-loaded core Tier 1 capital ratio under Basel III rules, a measure of financial strength, to exceed 9 percent by the end of the year and 10 percent by the end of 2014.
Osborne is seeking to reduce the taxpayers’ stake in the two banks before a general election due in 2015. The Chancellor of the Exchequer, constrained by the toughest austerity program since World War II, could use the proceeds of a sale to fund tax cuts or more spending before the vote.
Earlier this year, the Treasury reduced the price below which it would recognize a loss from selling its stakes in Lloyds and RBS to take into account fees the lenders paid the Treasury, officials with knowledge of the matter said in March.
Lloyds shares have advanced 31 percent this year, trading above the 61 pence price at which the government says it will break even on its holding after providing a 20 billion-pound rescue amid the 2008 financial crisis. RBS shares, which are up 7.2 percent in 2013, remain below the 407 pence break even rate on the government’s 45.5 billion-pound investment.