U.K. Urged to Cut Losses on Lloyds as Sale Speculation Grows

The U.K. government should return Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc to private ownership by the end of next year, even at a loss, according to a report by Policy Exchange.

Taxpayers should be given shares in the banks for which they would only pay when they decide to sell them, a proposal that would avoid drawing out the sale of the government’s stake over a period of years, according to the report. The Treasury could recoup its investment and investors would be protected from losses if the stock fell, the research group said.

“Now that the Policy Exchange proposal (which we are reading as a government policy document) is out, we think the political momentum for rapid disposals will build quickly,” Sandy Chen, a banking analyst at Cenkos Securities Plc in London, wrote in a note to clients today.

The government, which owns 39 percent of Lloyds and 81 percent of RBS after giving them a 65.5 billion-pound ($102 billion) bailout during the financial crisis, is seeking to reduce the stakes before a general election due in 2015. Chancellor of the Exchequer George Osborne may sell an initial 10 percent stake in Lloyds by the year-end, the Financial Times reported today, citing unidentified people close to the talks.

Prevent Collapse

“The measures taken to recapitalize the banks were designed to prevent the collapse of the financial system as a whole -- not act as investments,” Policy Exchange said. “On that basis it has worked.”

Lloyds declined 1.2 percent to 61.56 pence in London trading and RBS rose 2 percent to 334 pence.

“We will put the banks back in the private sector when it’s right to do so,” said a Treasury spokesman who asked not to be identified in line with government policy. “There’s no change in policy.”

Lloyds Chief Executive Officer Antonio Horta-Osorio said last month he expects to complete his turnaround plan as soon as next year. RBS CEO Stephen Hester has said the Edinburgh-based lender will have completed most of its restructuring next year, allowing the government to start cutting its stake by the end of 2014.

Asset Protection

The think-tank said that taking into account fees the banks have paid for using the Treasury’s Asset Protection Scheme, the government paid about 360 pence for its RBS shares and 53 pence for Lloyds. RBS rose 3.3 percent to 327.40 pence in London trading on June 7, while Lloyds advanced 2.4 percent to 62.32 pence. Prime Minister David Cameron refused last month to rule out selling the British government’s stake in RBS at a loss.

“We do not believe that banks should be state-controlled as a matter of principle,” Policy Exchange said. “The private sector is generally a better allocator of capital and while the errors of the banks in the run-up to the financial crisis showed the private sector too has its flaws, both the banks and the regulatory system are better-placed to deal with such issues in the future.”

Policy Exchange’s three founders, Michael Gove, Francis Maude and Nicholas Boles, are all now ministers in the coalition government.

Spokesmen for Lloyds and RBS declined to comment on Policy Exchange’s proposals.

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