ERIC Daniels, the chief executive of Lloyds Banking Group, is playing his hand in a win or lose all gamble, and the stakes could include the biggest rights issue in corporate history.
A year on since terse negotiations with the Treasury, led by the outgoing head of UKFI John Kingman, Daniels is desperately trying to mitigate the effects of massive state intervention in Lloyds. Last year, Kingman and Daniels hashed out a deal into
the wee hours which would see the government back a combined Lloyds and HBOS with a £17billion bailout package.
At the time, the chief executive of the Financial Services Authority (FSA), Hector Sants, argued this would make the bank "bulletproof" – although his view would prove overly optimistic.
Lloyds last week submitted a plan to the City watchdog to raise £25bn – £15bn through a rights issue and £10bn in asset sales. On Friday, however, bank investors said the fundraising element had been revised down to a more reasonable £10bn. The aim would be to allow Lloyds to sidestep the onerous terms of the asset protection scheme (APS) as well as demands by the European competition authorities to slim down its share of the UK retail banking market.
After a year spent playing with the cards dealt by the UK's tripartite authorities – the FSA, Bank of England and Treasury – as well as the European Commission, it is no wonder Daniels fancies his chances on his return to the City's game. It may be rough and tumble negotiating with institutional investors and potential buyers of bank's assets, but at least the rules are transparent.
There are many "what ifs" in Daniels' plan. Not the least of these is the prospect that, if the bank raised money from investors, the biggest of them – the government – would have to fork out an estimated £6.5bn to maintain its 43 per cent stake. But another £6.5bn may be more politically palatable than guaranteeing £260bn of Lloyds' assets through the government's insurance plan, the APS.
Daniels seems to share his fellow American Ambrose Bierce's cynical view of insurance. Bierce, a 19th-century soldier and wit, described insurance as "a game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table".
Instead, having earned his banking spurs in South America in the 1970s, Daniels is choosing the route of self-reliance. He would rather boost Lloyds' capital than rely on expensive government insurance.
But Daniels is not just gambling that he will get support for his scheme from City investors, he is gambling his job. If UKFI agrees to throw in £6.5bn, it could well ask for his head. Likewise if he capitulates to the APS, his days could well be numbered. Last week analysts were mixed on the plan. Credit Suisse said it was "feasible" for Lloyds to raise £25bn, while investors said the appetite for an issue was returning.
One investor said: "The share price is a little soggy, which tells you about the size of the issue coming. But if people were running scared, the share price would be going south at a rate of knots."
The other major risk surrounds how he intends to raise a further £10bn through asset sales.
The bank could get £5bn for insurance assets like Scottish Widows and insurance division Clerical Medical. But, although Clive Cowdery, chief executive of acquisitions vehicle Resolution, is in the market for insurance businesses, some doubt he can afford it. There is currently no buyer lined up.
Other assets might include the Lloyds TSB Wealth Management division. Or it could restructure debt, or sell loan or private equity portfolios. Last week Graeme Shankland, head of special assets at Lloyds Banking Group and former HBOS Corporate director, was staying mum on his negotiations with the bank for a portfolio of assets that could net the bank another £600m.
Avoiding the APS would mean Daniels could hang on to the large retail banking network he and his then chairman Sir Victor Blank acquired when they won a government mandate to take over HBOS.
Its lion's share of the retail banking market – 30 per cent of UK current accounts and 40 per cent of the mortgage market – is the big prize, but it is one that Neelie Kroes, the EC competition commissioner, has been threatening to break up.
RBS also faces a threat from the EC to reduce its share of the UK business banking market. Chief executive Stephen Hester is going ahead with the APS, but may try to raise £3bn-£4bn on the markets to reduce exposure to it. And while there is speculation that RBS will have to relinquish as many as 100,000 – or 10 per cent – of its small business customers, Hester has reassured shareholders the impact of the EC's "pound of flesh" would not be too severe.
Lloyds remains tight-lipped on its negotiations with the EC and Treasury, but leaks about the potential size of its fundraising shows it is testing the market. But in the absence of confirmed comment from Lloyds, most reaction – especially the will they/won't they buzz about a sale of Scottish Widows – is speculation, which can sometimes prove to be the joker in the pack.
For both Lloyds and RBS, a deal with the EC and the Treasury is expected soon – certainly before Kroes relinquishes her seat at the commission at the end of this month.
But the sensitivity of the current negotiations was underlined by Angela Knight, chief executive of the British Bankers' Association.
Knight was recently in Brussels to meet with Kroes and warned about the downside of speculation.
She said: "Frankly, we can make life harder by speculation. Speculation can actually be something that makes the Commission look at and wonder, maybe in a way that doesn't include the sort of reasoned outcome that is required."
