THE EVENT: Lloyds Banking Group PLC (LYG) and Royal Bank of Scotland Group PLC (RBS) Tuesday announced terms of their U.K. government bailouts and their divestment requirements mandated by the European Union, which seeks to prevent state-aided banks from having a competitive advantage over non-assistant banks.
Under plans cleared by the two banks with the government, the U.K. taxpayer will pay more upfront but have reduced exposure long-term compared with the original agreements.
In regard to the EU, Lloyds' overall deal is less onerous than that of RBS, as Lloyds had accepted less government aid than RBS had.
THE BACKGROUND: Lloyds and RBS announced plans to join a government-backed insurance scheme early in 2009 after running low on capital and being unable to raise it through other routes - but investors are now more willing to invest.
LLOYDS: Won't participate in the government's asset protection scheme and will pay GBP2.5 billion for the implicit protection it has already had. It will raise GBP13.5 billion through a giant rights issue and aims to swap GBP7.5 billion of debt into other capital, some of which could convert to equity if the bank again runs short of capital. The British government's shareholding will remain at 43.4% as planned and it will take up its share of the rights issue.
RBS: Will stay with the APS, but the pool of assets covered will shrink and RBS will have to bear the first GBP60 billion of losses instead of GBP42 billion. Instead of an upfront fee to join the scheme, it will pay annual installments and an exit fee when it wants to leave. The government will inject GBP25.5 billion in various ways and will have an economic interest of 84.4% - but its ordinary shareholding will be 70.3%.
NEW COMPETITION: The EU has demanded sell-offs from banks that were rescued by the state and both will have to make disposals. Lloyds will sell an Internet banking unit and its 600-strong Cheltenham & Gloucester-branded branch network and part of its Scottish operations.
RBS will have to sell much more, selling part of its U.K. branch and corporate business, RBS Insurance, Global Merchant Services and its interest in RBS Sempra Commodities.
U.K. banking sales will have to be made to small, new players to try and generate competition but over a long timescale.
HOW THEY WILL DO BUSINESS: Both banks have also agreed to keep to their pledges to lend to businesses and homeowners and not pay shareholders a dividend for at least two years. RBS has also agreed to limit 2009 cash bonuses.
RBS has also agreed to limit its debt activities, and Lloyds won't be able to make certain acquisitions for three to four years.
WHAT THEY SAID: The U.K. government: "The likely costs to the taxpayer and the risks on the impact on the public finances have been reduced. Both banks will still be required to meet tough conditions on pay and lending."
RBS Chief Executive Stephen Hester: "I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to standalone strength."
Lloyds Chairman Win Bischoff: "These proposals provide a significantly more attractive, market-based alternative to participating in [the asset protection scheme] and offer superior economic value to shareholders."
Execution analyst Joe Dickerson said there are still "significant questions" on how RBS will look after the disposals. "It's hard to see what shareholders are getting when investing in the bank." Dickerson also said Lloyds' plan to escape the asset protection scheme "is good news for shareholders, who won't see the bank being split like RBS."
ExaneBNP Paribas: "The greatest 'triumph' of this entire episode for Lloyds is probably the capitulation by Brussels, possibly assisted by the U.K. government, apparently choosing to give Lloyds special treatment in comparison to all other state-aided banks.”
-By Gren Manuel and Vladimir Guevarra, Dow Jones Newswires; +44 20 7842 9279; gren.manuel@dowjones.com