By Simon Nixon A DOW JONES COLUMN Who ever said life is fair? Eric Daniels drove Lloyds Banking Group into a brick wall last year but his reward is a sweet deal agreed with the UK government and European Union that gives him and his bank the chance of a fresh start. But Stephen Hester, who took charge of Royal Bank of Scotland when it was on the point of collapse, sees his own restructuring plans thrown into disarray by the EU, leaving him with an even longer and harder slog to escape government clutches. But hey, that's politics. Lloyds has been remarkably lucky. It escapes the government asset protection scheme on generous terms. The GBP2.5 billion fee for insurance already received is low when one considers the bank otherwise faced nationalization in March. Of the GBP21 billion in fresh capital it must raise, the Treasury will provide GBP6.5 billion via a GBP13.5 billion rights issue. It will also issue GBP7.5 billion of contingent convertibles, made palatable to investors by the UK regulator which helpfully agreed to a low 5% core Tier 1 capital ratio trigger to turn these Tier 2 debt securities into equity. These will provide Lloyds with a 1.6 percentage point buffer, enabling it to operate with what would otherwise look like a skinny 8.6% core Tier 1 capital ratio for such a troubled bank. Meanwhile the EU has let Lloyds off lightly under its state aid rules, requiring it to sell only its Cheltenham & Gloucester branches, its Intelligent Finance online unit and Lloyds TSB branches in Scotland. But that amounts to just 4.6% of the current account market and will make little impact on Lloyds' earnings. Extraordinarily, the EU has placed no restrictions on Lloyds' ability to exploit its 25% share of the UK retail market as it has done with other banks that have received state aid. RBS in contrast has little to cheer about. It must pay more to insure a smaller portfolio of assets and accept a higher share of the losses. The result is the UK government increases its shareholding to 84% and will provide a further GBP8 billion of contingent equity at a 4% annual fee, raising the prospect of further dilution. Worse, RBS must bear the brunt of the EU's determination to look tough on UK banks. The sale of a chunk of its domestic banks was expected, but the forced disposal of its insurance businesses, its commodity trading unit and restrictions on its debt underwriting business were not. These will reduce earnings and hit the share price, delaying the sale of government shares. That said, Lloyds still has a way to go too to escape the government yoke. And while its capital raising is fully underwritten, the long-term investment case isn't compelling. Despite GBP1.5 billion of anticipated synergies from the HBOS deal, Lloyds remains a geared bet on the UK economy. It says impairments have peaked and it's confident it can roll over funding falling due in the next two years without government guarantees. But that depends on the UK avoiding a double dip recession - still a real possibility. (Simon Nixon is European editor of Heard on the Street. He can be contacted on +44 207 842 9206 and Simon.Nixon@wsj.com) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackEurope@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.
