By Digby Larner
Of DOW JONES NEWSWIRES
The U.K.'s partially state-owned banks, Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group (LYG), Tuesday disclosed major capital-raising plans to bolster their balance sheets and detailed the divestments they will need to make to satisfy European Union competition concerns.
Lloyds, which is 43% state-owned, said it aims to generate at least GBP21 billion of core capital so that it can avoid using the government's asset protection scheme.
It will launch a GBP13.5 billion rights issue - which the government has agreed to subscribe to - and raise at least GBP7.5 billion more from exchange offers.
The bank will also dispose of an unspecified retail banking business that has a 4.6% current account market share and around 19% of mortgage balances. The move is intended to assuage EU antitrust concerns following its acquisition of troubled peer HBOS last year.
The EU remedies include the eventual sale of GBP180 billion in non-core assets and the bank will be forbidden from making certain acquisitions in the next three to four years.
Lloyds will have to pay GBP2.5 billion to the Treasury for side-stepping the government asset protection plan after previously saying it would sign up for the plan.
RBS, which is 70% state-owned, announced a string of planned divestments and a further capital injection of GBP25.5 billion from the U.K. government. The government's economic stake will rise to 84.4%, but its voting rights will remain at 70.3%
It intends selling its RBS branch network in England and Wales and NatWest branches in Scotland, as well as RBS Insurance, Global Merchant Services and its interest in RBS Sempra Commodities - all of which occupy leading market positions, RBS said.
"Divestments will be timed to maximize value and may be effected through initial public offerings, agreed sales or a combination of these. In particular, RBS Insurance is seen as a potential IPO in the later years of RBS's strategic plan," the bank said.
Unlike Lloyds, it will make use of the government asset-protection scheme to insure a GBP282 billion of loans and investments against any losses over an initial GBP60 billion.
Using the asset protection scheme will cost RBS GBP700 million a year through 2011, when the annual fee will drop to GBP500 million a year.
U.K. banks were some of the hardest hit by market turmoil last year, as investors lost confidence in their ability to withstand a prolonged recession and liquidity dried up.
In October 2008, the government invested GBP20 billion into RBS and GBP17 billion in Lloyds to help them keep lending to businesses and home buyers and make it through the then-deepening financial crisis. Lloyds later paid back about GBP2.3 billion.
The massive state aid meant the U.K. had to lay out to the EU how the banks could be restructured to ensure their long-term viability, a process that involved bashing out what disposals the banks would have to make to keep the U.K. banking sector competitive.
The two banks have hefty market share in a number of key areas, including RBS controlling about 20% of lending to small businesses, and Lloyds holding about 30% of both the current account and mortgage markets after its merger in January with HBOS.
Lloyds' merger with HBOS was pushed through by the government as the bail-out money was handed out last October. Chancellor Alistair Darling on Sunday said breaking up Lloyds, RBS and Northern Rock will help create three new lenders by 2013, boosting competition.
-By Digby Larner, Dow Jones Newswires; +33 1 4017 1748; digby.larner@dowjones.com
(Patricia Kowsmann and Margot Patrick contributed to this article.)