The UK’s two part-nationalised banks, Lloyds Banking Group and RBS, are under pressure again on Wednesday morning as the market continues to fret about potential state aid remedies.
Since ING, the Dutch financial services group, bowed to pressure from the European Commission and announced a radical break-up on Monday, shares in Lloyds and RBS have both fallen sharply:
But have these state aid concerns been overplayed? There are reasons for thinking so.
Recall that RBS has already submitted a restructuring plans to the EU: the bank is proposing to reduce its balance sheet by 40 per cent (from its peak level).
To be sure, there is a risk that more onerous conditions are imposed by the European Commission. Indeed, this point is well made by the Wall Street Journal this morning:
Like ING, RBS and Lloyds accessed bad-asset protection programs on generous terms. Both are vulnerable to European Union insistence that state-supported banks cede domestic market share. And RBS in particular could face the EU’s principle of “burden sharing,” which forced ING to dispose of its U.S. online bank to reflect ING’s heavy U.S. losses.
RBS is resigned to selling branches. But with ING, the EU decided existing restructuring plans didn’t count. RBS could be forced into disposals above the 40% reduction in its balance sheet that its strategic review already proposed. Potential bargaining chips include its investment bank and Citizens, its U.S. subsidiary.
But equally it’s worth noting, according to the analysts at Cazenove, that RBS’ proposed level of restructuring is commensurate with plans elsewhere in the banking sector that have already received EC approval — Commerzbank’s plans to reduce its balance sheet by 45 per cent, for instance:
In a view supported by comments made by the Competition Commissioner, RBS expects the EC will require it to dispose of some market share in SME banking in the UK, but it considers that the financial impact is unlikely to be material for shareholders. Estimates already reflect the run-down of non-core operations and so incremental conditions attached to SME banking are unlikely in our view to prove material or challenging to the group. We estimate a reduction in pre-tax of no more than £250m.
As for Lloyds, if the bank manages to avoid involvement in HM Treasury’s Asset Protection Scheme (as looks increasingly likely) the EC may feel that more draconian remedies — such as the sale of the entire Halifax branch network — are not necessary.
That said, Lloyds will probably have to go further than shed its Cheltenham & Gloucester subsidiary, which has 164 branches, given its large market share in current accounts and mortgages. But even if that is the case, it will only have a limited financial impact according to one sector watcher:
Press speculation is for enforced disposals at Lloyds of C&G and Lloyds TSB Scotland, and at RBS for RBS-branded branches in England & Wales as well as some parts of the corporate loan book. Together with the upcoming split of N Rock into good bank / bad bank and the more draconian than expected break up of ING, this will lead to further headline grabbing articles re the break up of Lloyds and RBS. In fact, if the EU remedies for Lloyds and RBS are in line with these press expectations then it would have only a limited impact on their financial outlook – particularly as there should be 5 years allowed for the disposals to be done.
A bigger drag near term on Lloyds would be selling the life operations Widows & Clerical Medical. Assuming a 0.7x price/EV disposal price would imply up to cGBP3bn capital hit, c11p per existing shareholder and c7-8p on a fully diluted basis (assuming GBP11bn rights issue).
Anyway, all will be revealed soon. Neelie Kroes, Europe’s competition chief, wants to reach a final decision on Lloyds and RBS before the official end of her five-year term on Saturday.
Related link:
EU ruling threat to Lloyds’ branches – FT