Shareholder fury over Lloyds rescue plan

(AFP/Getty Images)

Lloyds shares suffered a further slump today as investors gave a poor reception to the latest rescue that will leave the bank majority owned by the taxpayer.

Shares dropped by as much as 11 per cent after stock markets opened for the first time since details of the multi-billion pound bailout were unveiled over the weekend.

Other banks were also in the red as the spotlight remained firmly on the embattled sector.

HSBC dived 10 per cent as it continued to suffer in the fall-out from last week's £12.5bn rights issue, while Barclays shares were also hit as reports suggested the group was next in line to take part in the Government's Asset Protection Scheme.

The plan to insure £260bn of "toxic" assets held by Lloyds will help bolster the bank's balance sheet, but investors reacted badly to news that their shareholdings will be significantly diluted.

Lloyds bosses are now facing calls to quit as shareholder fury mounts over the deal that will see the Government's stake upped from 43 per cent to a controlling interest of at least 65 per cent.

It will also cost Lloyds a premium of nearly £16bn to take part in the scheme.

Chairman Sir Victor Blank and chief executive Eric Daniels have come under pressure surrounding the takeover of struggling HBOS, which has saddled the wider group with losses and bad assets.

HBOS last month reported annual losses of nearly £11bn.

It is thought that Lloyds is starting a series of meetings with investors today to garner support for the "toxic" asset insurance plan.

Shareholders will have their chance to vote on the deal at some stage, although Lloyds has not confirmed when this will take place.

Banking experts said the deal helped Lloyds overcome immediate capital strength concerns, but was expensive for the group and for shareholders.

Bruno Paulson, an analyst at Bernstein, said in a note: "The guaranteed asset protection scheme looks to be very thorough, in terms of virtually eliminating the risk of full nationalisation...but also in terms of diluting the existing shareholders."

Roger Lawson, chairman of the UK Shareholders' Association (UKSA), which represents private investors, said Lloyds investors were left paying the price for a "disastrous" move to buy troubled HBOS.

"The general view of Lloyds investors is that Sir Victor Blank and the rest of the board should go," he said.

The UKSA said it would be meeting today to decide what action to take, and hopes investors will be able to have their say when the latest Lloyds state rescue comes up for shareholder vote.

Lloyds chiefs have agreed to provide £28bn of extra mortgage and business lending over the next two years to help drag the UK out of recession under its deal with the Government.

The State already owns a near-70 per cent stake in rival group Royal Bank of Scotland after a similar rescue package finalised earlier this year.

The Lloyds bail-out will see the Treasury buy billions of pounds worth of non-voting shares in Lloyds that could be upgraded later - potentially taking the Government's active interest to 75 per cent.

Lloyds had to turn to the Government for help following its takeover of loss-making HBOS.

Ministers are thought to have forced through a far tougher package than wanted by the Lloyds board, which had fought to avoid the bank becoming majority public-owned.

The premium for insuring against losses on £260 billion of bad assets will be £15.6bn, or about 6 per cent.

By comparison Royal Bank of Scotland, which has struck a similar deal, is being charged £6.5bn on the £325bn of assets it has insured.

Lloyds will also have to take an initial hit of £25bn on any losses before the insurance kicks in - whereas protection for RBS starts after £19.5bn.

But yesterday Lloyds stood by its decision to take part in the Asset Protection Scheme and said it was fully behind its management team.

A spokesman said: "Our board is very much behind our management.

"The board unanimously cleared our participation in the Asset Protection Scheme and the acquisition of HBOS.

"Our directors know that the short-term outlook could be challenging and that has proved to be the case.

"We very much believe that in the medium term, the acquisition of HBOS will deliver substantial benefits for our shareholders."

Barclays is reportedly next in line to tap the Government's "toxic" asset scheme and is said to have begun negotiations about the taxpayer underwriting up to £150bn of its bad credit assets.