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Banks saved by £37bn injection
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Date: Monday 13 Oct 2008
LONDON (ShareCast) - Three of Britain’s biggest banks are to benefit from a £37bn injection of cash from shareholders and the UK government, although ministers will get a say on dividend policy and bosses pay.
Royal Bank of Scotland is to receive £20bn, while HBOS and Lloyds will get £17bn jointly, but RBS chief Fred Goodwin, HBOS head Andy Hornby and chairman Dennis Stevenson have paid with their jobs.
As part of today’s deal, RBS will offer £15bn worth of new shares at 65.5p to be underwritten by HM Treasury. In addition, the government will subscribe for £5bn of preference shares.
The capital raising will increase RBS's pro forma core tier 1 and tier 1 capital ratios by approximately 3 percentage points and 4 percentage points respectively, on a proportionally consolidated basis.
Turbulent markets convinced Lloyds TSB to revise down the terms of its offer for rival HBOS and raise £5.5bn of new capital, with HBOS raising a further £11.5bn.
The bank, which had offered 0.833 of its shares for each HBOS share, is now only prepared to offer 0.605 of its shares for each share in the Halifax-owner. HBOS is recommending the lower offer, which has been sanctioned by the Takeover Panel.
That values HBOS at around 114p a share, or just over £6bn, less than the 124p closing price on Friday. The deal was originally valued at over £12bn.
Lloyds wants to raise a total of £17bn of capital. HBOS will raise £11.5bn, made up of £8.5bn in ordinary shares and £3bn in preference shares bought by the British government, and £5.5bn, including £4.5bn in ordinary shares and £1bn in preference shares, will be found by Lloyds.
The government is to closely scrutinize remuneration of senior executives. There will be no cash bonuses in 2008, though options were not mentioned, it said. Remuneration policy going forward will be reviewed and "linked to long-term value creation, taking account of risk; and restricting the potential for 'rewards for failure".
Lloyds said it will ask its executive directors to take their 2008 bonus entitlement in Lloyds shares, which they wouldn’t be able to sell until December 2009, rather than cash, although they won’t be forced to.
But Barclays has decided to go it alone. The bank unveiled plans to raise £6.5bn from shareholders and other investors without the need of government help, with a further £3.5bn to come from a dividend cut and other sources.
It intends to raise £3bn by the end of this year by issuing preference shares as part of the commitment made by UK banks to increase Tier 1 capital by £25bn by year-end.
A further £3bn will come from the issue of ordinary shares following publication of its full year 2008 results and before the end of March 2009.
The extra £6.5bn of equity raised would mean a pro forma Tier 1 Capital ratio as at 30 June 2008 of over 11%.
“Following the completion of these capital investments, each of the above institutions will have a Tier 1 capital ratio in excess of 9% well above international minimum standards and at a level that should put them on a strong footing for the future," a statement from the Treasury said Monday.
The measures will provide them with sufficient liquidity in the short term and give them time to restructure their finances, the statement added.
Also, the banks will give support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives.
"The government is not a permanent investor in UK banks. Its intention, over time, is to dispose of all the investments it is making as part of this scheme in an orderly way," it added.