Osborne Weighs Lloyds Sale as RBS Breakup Examined: U.K. Credit

Chancellor of the Exchequer George Osborne said the U.K. government is “actively considering” selling shares in Lloyds Banking Group Plc, though privatizing Royal Bank of Scotland Group Plc is still some way off.

“Five years on from the financial crisis, we can now take the first steps to returning Lloyds to the private sector where it belongs,” Osborne told financiers in his annual Mansion House speech in London yesterday. “Of course, we will only proceed if we get value for the taxpayer. And we have no pre-fixed timescale or method of disposal.”

The announcement comes after a parliamentary report published yesterday said Lloyds, which is 39 percent-owned by the government, was better placed than RBS to return to private hands. Osborne said the Treasury will “urgently” investigate the case for breaking up RBS and hiving off its toxic assets into a “bad bank.”

Credit-default swaps covering Lloyds debt for five years are little changed since the end of May at 147.6 basis points. By contrast, investor perceptions of RBS’s creditworthiness are deteriorating. Similar contracts on RBS bonds have risen to 198.1 basis points from 168 basis points.

Osborne said the first block of government shares in Lloyds will probably be sold to institutions as “the most effective way of managing risk and getting value.” The government will consider a retail offering to the public at a later stage.

Broken Even

Lloyds Chief Executive Officer Antonio Horta-Osorio said last month that the lender would post a full-year profit in 2013. Its shares currently exceed the level at which the government says it will break even on its holding after providing a 20 billion-pound ($31 billion) rescue almost five years ago.

RBS, which is 81 percent state-owned, is weighed down by too many poor assets, Osborne said. The Edinburgh-based lender received a 45.5 billion-pound bailout, the costliest in banking history, during the global financial crisis. RBS shares remain below the level at which taxpayers breakeven.

Investors demand 122.2 basis points of extra yield to hold RBS’s $2 billion of 2.55 percent notes due September 2015 instead of similar-maturity government bonds. That’s close to the highest since Feb. 12.

‘Way Off’

“I will only sell our stake in RBS when we feel the bank is fully able to support our economy and when we get good value for you, the taxpayer,” Osborne said. “When it comes to RBS that moment is some way off.”

The timing of a possible RBS sale was thrown into confusion last week after CEO Stephen Hester announced he would quit by the end of the year, without announcing a successor, instead of leading the bank out of state control. Chairman Philip Hampton had suggested the bank would be in shape for the government to start cutting its stake by the end of 2014, months before the next general election.

In its “swift” review examining whether to split RBS into a good and a bad bank, the Treasury will particularly examine its assets in Ulster Bank and U.K. commercial property, the chancellor said. RBS has channelled about a third, or 14 billion pounds, of its bailout to prop up its Irish division since 2009. A decision on the future structure of RBS will be taken in the fall, Osborne said.

Three Goals

Osborne, who has in the past expressed reluctance about splitting RBS due to the amount of public money this may require, ruled out injecting more funds into the bank as part of this process or increasing the government stake.

“We will establish a bad bank if it meets our three objectives: if it supports the British economy, if it’s in the interests of taxpayers -- and if it accelerates the return to private ownership,” he said. “If the review reveals that it wouldn’t achieve these things, then we won’t do it.”

Osborne also said that recent data showed the economy is healing and that the U.K. is “moving from rescue to recovery,” though the situation in the euro area remains fragile.

“While Britain has left intensive care, we still need to secure the recovery,” Osborne said. “Recent volatility in financial markets is a reminder that no recovery from such a deep and damaging global recession is going to be straight-forward.”

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