Lloyds rights issue expected in next few days
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Lloyds is expected to launch a £11bn rights issue in the next few days to avoid the bank having to take part in the government’s asset protection scheme.
This comes in the wake of a series of disposals from the bank – its fund management arm to Rathbones for £35.4m today, and the Halifax Estate Agency business last week for £1.
Paul Mumford, senior fund manager at Cavendish Asset Management says shareholders should back the rights issue.
He says: “The costly rights issue rumoured in the market represents the lesser of two evils for shareholders, who should back the bank in its bid to escape the Asset Protection Scheme. Looking at the performance of banks such as Barclays, which avoided government protection, it is clear that the market recognises there is greater upside to be enjoyed by an independent banking sector.
“The condition of Lloyds exiting the APS is it becoming much more strongly capitalised to act as a safety buffer. This leaves investors with the prospect not only of sheer scale, following the HBOS merger, but with a vehicle capitalised well beyond what is likely to be necessary in anything other than the very worst case scenario. The problem of entering the APS is that Lloyds shareholders will be left with all the downside but none of the upside should the bank not sustain worst-scenario levels of losses. “
He says Lloyds would pay a massive premium that the market now believes could well exceed the extent of insured losses, given the more benign economic picture emerging. Tomorrow’s rewards would be enjoyed by the taxpayer at the expense of the battered shareholder.
He adds: “If Lloyds escapes the net of the APS, it will probably be in no worse a financial position than if it had gone into the scheme.
“But, crucially, if losses are at the lower level currently expected, Lloyds will retain the excess capital. In due course, that excess could well give Lloyds the route to reduce the government’s holding by buying out all or part of its stake. Having originally bought into the dubious HBOS story, institutions would be wise to see Lloyds through this painful chapter and back it on a longer term horizon.”
