Lloyds Banking Group Better Positioned to Recover than RBS

It looks like Royal Bank of Scotland Group (RBS) drew the short straw in the UK government’s latest shakeup of the UK banking sector.

As DealBook reported, RBS agreed to sell its insurance business and some bank branches in England, Wales and Scotland to meet European competition rules on accepting state aid. The bank, which is already majority-owned by the British government, will receive an additional government investment of £25.5 billion ($41.6 billion) and accept help in containing potential losses from problem assets. As a result, the government’s stake in the bank will increase to 84.4 percent from 70 percent.

In contrast, Lloyds Banking Group (LYG) announced plans to tap investors for £21 billion in what would be Britain’s biggest rights offering to avoid handing over a majority stake to the government. The planned sale of shares and exchange offers would allow the bank to fulfill capital requirements without ceding additional ownership or control to the government. The state already owns a 43 percent stake in Lloyds.

CreditSights says Lloyds Banking Group and RBS “are paying a high price for previous failings, but that the measures should provide them enough protection to start a genuine recovery.”

• Both are still reliant on state support, however – and will suffer the usual sanctions from the European Commission of enforced interest deferral and business disposals
• But the path ahead now looks clearer, with Lloyds in a better position to recover than RBS
• Hybrid bondholders in RBS will have to endure coupon deferrals, but those in Lloyds are offered a way out – even if not very appealing – via contingent convertibles
• There could also be implications for holders of RMBS in Cheltenham & Gloucester
• This is positive news for senior and subordinated bondholders, although the banks’ earnings performance will continue to be depressed by high credit loss impairments in the near term.

However, Lloyds is closer to regaining health than RBS, and today’s announcements emphasise that gap

But Ian Gordon at Exane BNP Paribas backed the new terms of RBS’ participation in the government’s toxic asset insurance scheme. He upped the stock’s rating to “neutral” from “underperform” and said: “We see clear benefit arising from both the significant reduction in cost as well as the now highly accretive issuance of £25.5bn of B shares at 50p.”

For the full CreditSights analysis click here.