Capital proposal doesn't go far enough to make LBG disposal attractive

Whilst the discussions that Lloyds Banking Group are having with the Regulator, if successful, about easing the capital burden for whoever acquires the 632 branches it is disposing of would help they still don’t go far enough to make this an attractive deal for shareholders nor give the purchaser the chance to be a real contender in the short term. The argument that Lloyds Banking Group is putting to the regulator is that because whoever acquires the business will get a senior and experienced banking team the risk should be lower and therefore the need to hold more capital than existing banks should not be necessary. Whilst this might reduce the amount of core capital the new bank would need to hold by around £1.5bn this is a mere drop in the ocean in comparison to the £25-30bn bridging loan that the buyer will need due to fund the gap between the deposits and the loans that the buyer will acquire.

The impact of having such a mismatch between the loans and the deposits is that the increased cost base to service the bridging loan will put the new bank at a significant disadvantage to the incumbants, so the aim of creating a new challenger to the Big 5 banks may well not be achieved.

To overcome some of this challenge Lloyds Banking Group could look at persuading the EU that either the timescales of the transfer of the loans be extended so that initially there is more balance between loans and deposits and also a slower ramp up of the need for wholesale funding, which could result in the cost of that funding being lower, or argue that in the interests of making the new bank more competitive less loans should be transferred. The danger with making these proposals to the EU could be that it would backfire on Lloyds Banking Group and the EU could insist that more deposits are transferred to the purchaser to significantly reduce their funding needs; something  Lloyds Banking Group would not want to do.

In terms of shareholders, given how low bank valuations currently are, given the funding issues and the lack of serious competition to buy the branches rushing through the sale at this time will not result in the best price being paid and in the long term does not represent good value.

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