Commission kills hopes of Lloyds or RBS sell-off

Uncertainty over future will force state to hold on to stakes
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The Independent Online

Hopes that that the taxpayer might soon see a return from the billions pumped into Lloyds Banking Group and Royal Bank of Scotland (RBS) have been all but written off thanks to the launch of the Banking Commission.

UK Financial Investments is understood to have all but ruled out any attempted sale of the Government's stakes beyond a small "test the water exercise". Leading bankers are understood to have given warning that even this may prove impossible because of uncertainty over the shape of the industry created by the Commission, not least the chance that the 41 per cent state-owned Lloyds could be broken up.

This means that even the "test the water exercise" is now unlikely to be attempted until after the Commission has reported its findings and the Government has made its response. Shares in Lloyds – which on Friday closed at 73.5p, down 0.62p – are just above the 72.2p level at which the taxpayer will make a small profit on its £20bn investment.

RBS, in which the Government holds an 84 per cent stake, closed on Friday at 47.47p, up 0.46p but still a shade below the 49.9p a share at which the taxpayer is in profit on the £45bn it has cost to bail out that bank.

Both banks have shown signs of returning to health in their recent results, particularly Lloyds which turned a first-half loss of £3.9bn in 2009 into a profit of £1.6bn for the first half of 2010, ahead of City forecasts.

But senior bankers and analysts agree that the Government's setting-up of the independent Commission kills off any hopes of a quick return from the taxpayer's investment, despite the Government's desperate need for revenue to cut Britain's yawning budget deficit. The Commission, chaired by Sir John Vickers, said it plans to look at possible "over-concentration" in UK retail banking as it commenced taking evidence just over a week ago.

Ian Gordon, a banking analyst at Exane BNP Paribas, said: "A sale is not impossible but it is highly unlikely. In any sale document the Commission would have to be disclosed as a material and uncertain risk factor. Both in terms of this and in terms of value maximisation, it makes sense to wait."

Mr Gordon said the Commission meant that there would be a discount attached to the shares of all UK-listed banking groups until it has published its findings. In addition to the over-concentration of retail banking in Britain, it has been asked to look at whether Britain should bring in laws to force a split between retail and investment banking operations.

HSBC, Barclays and Standard Chartered have already indicated that such a move could force them to quit Britain. The state has no investment in those banks – unlike in Lloyds and RBS – leaving them free to make such a move. Bankers believe this makes a forced break-up unlikely. However, many also say the Commission poses the biggest threat to Lloyds. The Government waived competition rules when it rescued HBoS, but the bank's holding of between a fifth and quarter of key areas such as current accounts, unsecured lending and mortgages is becoming increasingly controversial.

In response, one of Britain's most senior bankers said: "Basically, that means a sale is impossible. The biggest question facing the Commission is Lloyds. It has between 20 and 25 per cent of mortgages, current accounts and loans and there are huge competition issues. You couldn't sell any of the Government stake without reassurances that it won't be broken up."

Commission watchers have noted that Sir John was head of the Office of Fair Trading when Lloyds' attempt to take over Abbey was blocked during the early part of the last decade.