£17bn needed to fund Lloyds TSB and HBOS merger and boost balances

Lloyds TSB and HBOS will need to raise £17bn to fund the planned merger and boost their balance sheets, but Lloyds today pledged to repay £4bn of taxpayer cash by the end of 2009.

The group's plans would allow it to resume paying dividends to shareholders next year, it said.

Banks using the Government's £37bn part-nationalisation scheme cannot pay dividends on ordinary shares again until they have bought back preference shares held by the State.

It has been a controversial point for Lloyds shareholders, given the prospect of no payout for some time.

But Lloyds said in a document detailing the bid for HBOS that its "clear intention" was to buy back the preference shares during 2009.

The group is raising £5.5bn in a Government underwritten share placing, while HBOS is seeking an £11.5bn capital boost.

Lloyds will sell £1bn in preference shares to the Government, with another £4.5bn being made available to investors.

If it fails to achieve investor take-up, the Government will pick up the tab.

HBOS is meanwhile appealing to investors for £8.5bn, while it is also selling £3bn in preference shares to the Government.

If investors snub the new shares, the Treasury will take them up, leaving it with a potential stake of up to 43.5 per cent in the new business.

Lloyds TSB and HBOS renegotiated the terms of their merger last month in the light of the mammoth capital-raising exercise, with Lloyds paying just 0.605 of its shares for every HBOS one. This values HBOS at around £6.9bn.

HBOS investors will own just a fifth of the overall group, with Lloyds TSB shareholders potentially holding little more than a third, or 36.5 per cent.

Shareholders of both banks will have their chance to vote on the deal over the next two months.

If they approve the merger, the banks are hoping to complete the deal in January next year.

Details of the bid emerged today as both banks outlined further woes amid the credit crunch.

HBOS writedowns have swelled by £2.72bn to £5.18bn since the end of the second half, while Lloyds suffered a £270m hit from the credit crunch in the third quarter.

HBOS said falling house prices and homeowners increasingly struggling with repayments had sent bad debts soaring from £722m to £1.25bn.

It also disclosed a further £3.8bn in reduction of assets held on its book, although it stressed this was not taken off the bottom line.

Lloyds also saw a rise in the level of borrower arrears, up 14 per cent over the past 12 months.

The group anticipates further writedowns of £300m in its wholesale and international banking business in the second half of the year.

However, Lloyds said it remained on track to deliver good trading performance this year and was seeing signs of improvements in wholesale money markets.

Collins Stewart banking analyst Alex Potter said there were few surprises in Lloyds' update today, with news on its aims to resume dividend payments next year a "material positive".

Experts at Numis Securities described the figures from HBOS as "terrible", but gave the deal the thumbs up.

"We continue to believe that the merged Lloyds/HBOS will hold a uniquely strong position in UK financial services," said a Numis note."

It added that cost savings could eventually total £2bn.