Banks' shares rise amid 'rework bail-out' reports

Shares in the three UK banks being bailed out by the British government rose today amid reports of pressure for the £37bn (€47.51bn) plan to be reworked.

Royal Bank of Scotland and merger partners Lloyds TSB and Halifax Bank of Scotland have seen their shares continue to slide after the rescue deal was announced.

The scheme allows the banks to receive billions of pounds of emergency capital but bars them from paying out dividends to ordinary shareholders until hefty government stakes are repaid.

But, after reports that the executive was pressing ministers to rethink the scheme to make it more attractive to shareholders, Lloyds TSB and HBOS rose 7% and 4% respectively. RBS was nearly 2% higher.

Under the deal’s terms, the three banks are prevented from paying out dividends to ordinary shareholders until they have fully repaid £9bn (€11.56bn) of preference shares being issued to the Government. That appears to have been a major turn-off for investors, many of whom rely on dividend income.

According to the 'Financial Times', the banks’ bosses are asking the government to allow them to quickly redeem the preference shares either by raising other finance or selling assets.

Ministers have so far stressed that the banks signed up to the deal voluntarily.

The Treasury said: “The recapitalisation package the chancellor announced following agreement with the banks will put banks on a stronger footing and help to stabilise the banking system, making it more resilient in the future.

“The details were set out clearly by both the government and the individual banks.”

Tony Craze, from market analysts DawnTraders.co.uk, told the BBC: “You couldn’t give Lloyds TSB shares away yesterday in the market, or HBOS. They really went into freefall.

“At the end of the day, there are only two reasons anybody buys a share. One you expect the share price to go up and two, you expect to pay a dividend.

“If companies aren’t paying a dividend that’s 50% of the reason not to buy a stock.”

He added: “I believe we haven’t thought this one through. I believe we are going to have to go back to basics with this and have to pay the dividends.”

Shore Capital analyst Danny Clarke said yesterday shares in the banks had fallen despite the Government assistance as investors weighed up the poor short-term prospects for the combined business.

Of the Lloyds TSB-HBOS tie up, Mr Clarke said: “The combined entity does not look like an attractive short term play.”

The Government could end up owning about 60% of RBS under the terms of the bail-out, and 43.5% of the merged Lloyds TSB-HBOS bank.

At the market close yesterday, the taxpayers’ paper loss on the former’s potential stake was about £100m (€128.46m), while the latter’s was about £2.5bn (€3.21bn).