Lloyds Banking To Raise GBP 21 Bln Of Core Capital; Backs FY09 Loss Forecast - Update

(RTTNews) - UK-based Lloyds Banking Group Plc (LYG | Quote | Chart | News | PowerRating) Tuesday announced its proposals intended to meet its current and long-term capital requirements. The proposals include the generation of at least GBP 21 billion of core capital, immediate 230 bps increase in core tier 1 capital ratio and the disposal of a retail banking business with a 4.6% current account market share and about 19% of the group's mortgage balances. Separately, the bank said that it continues to expect the group to report a loss before tax for 2009, excluding the impact of GBP 11.2 billion credit relating to negative goodwill.

The bank said that the proposal to generate at least GBP 21 billion of core capital comprises GBP 13.5 billion rights issue and exchange offers to generate at least GBP 7.5 billion of contingent core tier 1 and/or core tier 1 capital. HM Treasury, advised by UKFI, has undertaken to subscribe in full for its 43% entitlement.

The bank said that if shareholders approve the proposals, the group will not participate in the Government Asset Protection Scheme, or GAPS.

According to the bank, its wholly-owned indirect subsidiary LBG Capital No.1 Plc has offered all security holders to exchange any or all of their existing outstanding securities for Enhanced Capital Notes, or ECNs, or the relevant exchange consideration to be delivered in the form of new shares, cash or, in certain limited circumstances, additional ECNs.

The company said, holders who wish to participate in the exchange offer may choose from four exchange options. The bank also said that a separate exchange offer will be made in certain countries outside the US and to certain sophisticated holders in the US who are 'qualified institutional buyers."

The exchange offer forms part of a wider package of proposals, under which the group will generate at least GBP 7.5 billion in core tier one and/or nominal value of contingent core tier 1 capital through the exchange offer and/or related arrangements, and raise GBP 13.5 billion, or GBP 13 billion net of expenses, by way of a rights issue. The proposals are subject to shareholder approval.

The company's Board believes that the proposals, which are fully underwritten, provide a significantly more attractive alternative to participating in the UK Government Asset Protection Scheme and offer superior economic value to shareholders.

The bank said that the offer is being conducted with respect to 52 series of Existing Securities, comprising Upper Tier 2 securities in an aggregate principal amount of GBP 2.52 billion, innovative Tier 1 securities in an aggregate principal amount of GBP 7.68 billion and preference shares with an aggregate liquidation preference of GBP 4.09 billion.

Further, Lloyds said that the existing securities may be adversely affected by the outcome of negotiations between the company, HM Treasury and the European Commission. These negotiations have made clear that the European Commission intends to require a commitment that members of the group will not make a discretionary payment of coupons or dividends on hybrid capital securities issued by members of the group and blocks on the exercise of optional early redemption features for a period of two years beginning on January 31, 2010.

Additionally, the bank said that it will pay GBP 2.5 billion to HM Treasury for the benefit to the Group's trading operations as a result of HM Treasury proposing to make GAPS available to the Group. The bank also continues to expect cost synergies of over GBP 1.5 billion per annum by 2011.

Separately, the bank said that it has delivered good revenue growth in the third quarter of 2009 with a strong performance in its core relationship businesses, excluding the gains on liability management transactions. Third-quarter margin was flat compared to the first half of 2009. The bank also stated that group banking net interest margin continues to benefit from ongoing asset repricing which has offset the impact of lower deposit margins and higher funding costs.

Further, Lloyds said that revenue trends in Retail reflected a solid overall business performance. In lending, unsecured balances have remained broadly flat, reflecting subdued customer demand. Mortgage markets have also remained relatively subdued throughout the industry, and the bank's gross mortgage lending totaled GBP 26 billion in the first nine months of the year.

According to the bank, revenue growth at its Wholesale business remained very strong in the first nine months of the year, largely reflecting the absence of last year's mark-to-market losses on treasury assets, although the growth rate slowed during the third quarter. There was a continued strong cross-selling performance, supported by improved spreads and favorable trading conditions in Treasury and Trading.

In Wealth and International, revenue trends improved in the third quarter compared to the first half, reflecting higher customer numbers and strengthening equity markets in Wealth, and the impact of higher margins from the continued repricing of assets in its International businesses.

In Insurance, new business sales in the company's life, pensions and investments businesses declined 27% from the first nine months of 2008, reflecting extremely difficult market conditions which have led to a general market-wide slowdown in the sale of life, pensions and investment products.

Lloyds also stated that Group's costs dropped 2% for the period. The bank has already realized GBP 250 million of cost synergies and other operational efficiencies in the first nine months of the year to support a target for 2009 which has now been increased to GBP 450 million. The bank expects that these will represent annual run-rate savings of approximately GBP 750 million by the year-end, about GBP 50 million higher than its previously announced expected run-rate.

The bank also remains confident that it will meet its commitment to deliver more than GBP 1.5 billion run-rate synergies and other operating efficiencies by the end of 2011, despite the business impact of the State Aid remedies, which are expected to be required by the European Commission.

Further, Lloyds said that in the third quarter, it has experienced a reduction in the run-rate of overall impairment provisions compared to the first half of the year. However, the bank experienced a significant year-to-date rise in the impairment charge compared to last year, reflecting falls in the value of commercial real estate, the impact of economic deterioration. Overall, impairment losses for the Group was GBP 18.6 billion for the nine-month period, up from GBP 13.4 billion last year.

In Retail, impairment losses for the nine-month period were GBP 3.3 billion. The Wholesale charge for impairment losses totaled GBP 3.2 billion in the third quarter, reflecting continuing declines in commercial property prices and reducing levels of corporate cash flows. In the Wealth and International business, the bank recorded impairments of GBP 0.9 billion in the third quarter.

Commenting on the interim management statement, Eric Daniels, Group chief executive, stated, "In all key areas of the Group we are delivering in line with recent guidance. Consistent delivery against these goals underpins our ability to achieve the Group's long-term growth opportunities."

Looking ahead, the bank continues to believe that the charge in the second half of 2009 will be significantly lower than the charge in the first half of 2009, given its current economic outlook. The bank also expects the 2010 charge to be significantly lower than the 2009 charge.

As previously announced, the bank projects a moderate increase in the overall Retail impairment charge in the second half of the year, largely reflecting the anticipated impact of rising unemployment levels. The bank continues to expect the retail impairment charge to be lower in 2010 than in 2009. Residential house prices are currently estimated to be flat in 2009 and 2010.

Further, Lloyds said that it continues to expect a significant reduction in the Wholesale impairment charge in the second half of 2009 and a further reduction in 2010. Commercial real estate prices are now expected to decline 15% in 2009 and be flat in 2010. In Wealth and International, the bank now expects the high level of impairments to continue throughout 2009 and in 2010.

Lloyds also said that David Manning, director since May 1, 2008, has informed the group of his intention to step down from the Board with immediate effect.

LYG closed Monday's trading at $5.44, down $0.13, on a volume of 2.91 million shares.

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