Lloyds, RBS agree to massive shake-up

Tue Nov 3, 2009 8:09am EST

By Clara Ferreira-Marques and Steve Slater

LONDON (Reuters) - Britain's two largest retail lenders are to get another 31 billion pounds from the government and have agreed to sell hundreds of branches and key businesses to appease EU competition concerns over state aid.

The deal announced on Tuesday paves the way for Britain to begin reducing its holdings in Royal Bank of Scotland and Lloyds Banking Group, a potentially critical source of funds as the country struggles with a ballooning budget deficit.

RBS and Lloyds ended months of uncertainty, with Lloyds announcing that it would drop out of a government insurance scheme for bad debts by raising 13.5 billion pounds ($22.08 billion) in the world's largest ever rights issue, as part of a 21 billion-pound capital raising plan.

The move leaves RBS, 70 percent state-owned, as the only bank joining the government's Asset Protection Scheme but under more flexible terms than expected earlier this year, which RBS said will allow it to leave the scheme within four years.

Both banks, however, also agreed to disposals to meet EU state aid rules, with RBS particularly hit, selling chunks of its retail bank under the revived brand Williams & Glyn, its RBS Insurance arm and shrinking its investment bank.

"We do feel bruised by what we've had to go through," RBS's chief executive Stephen Hester said on a conference call.

"Our job (of turning around RBS) has been made more difficult by some of the aspects of the EU settlement, but nevertheless we believe it is a doable job," he added.

Shares in RBS were down 4.8 percent at 1100 GMT at 36.8p, well below the average price of 50.5p paid by the government for its stake in the bank. Lloyds, whose takeover of beleaguered rival HBOS was backed by the state, was up 1.3 percent at 86.2p, also below the government's entry price of 122.6p.

"The news is potentially good for both UK consumers and rival banking groups, although more debatable for both Lloyds and RBS shareholders," Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers.