EC may force Lloyds to sell parts of business

The British part-nationalised Lloyds Banking Group may be forced to sell off parts of the business as the price of UK government support, the bank said today.

The European Commission could compel the bank – which is 43% taxpayer-owned - to “divest or exit core businesses” as a condition of granting state aid approval, Lloyds said.

The warning came in a circular at the launch of its bid to raise £4bn (€4.54bn) to buy back the expensive preference shares held by the British government, on which the bank must pay £480m (€544.1m) in dividends every year.

Lloyds must gain European approval for its business plan after taking part in last autumn’s recapitalisation and credit guarantee scheme, as well as placing £260bn (€294.7bn) of toxic debts into the taxpayer-backed Asset Protection Scheme (APS).

“The terms of such a forward plan are likely in particular to include the obligation to reduce significantly the size of the group’s balance sheet and/or behavioural restrictions.

“The group expects such reduction in the balance sheet to be achieved through making divestments of or exiting non-core businesses. However, a reduction could require the group to divest or exit core businesses.” it said.

This could be “materially adverse” to the bank’s interests, Lloyds added.

Lloyds is still in talks with the British government over the terms of the APS scheme, so any ruling from the EC and potential disposals are likely to be years away - by which time a recovery should be well under way.

A spokesman said: “We believe that our participation in the Asset Protection Scheme is in our own commercial interests as well as the interests of the UK as a whole. The APS is about encouraging banks to lend more and financial stability.

“We are already working towards a situation where state aid is no longer required. The placing and open offer is a good example of this. We are working closely with the Government on this issue and will continue to do so.”

Lloyds’ share price fell today to reflect the dilutive impact of the extra new shares being offered.

Lloyds has around 2.8 million private shareholders, who together own just less than 10% of the bank. The average Lloyds investor with 550 shares would have to spend around £130 (€147) to take up the new shares, being sold at 38.43p each.

Any shares left over will be sold in the market and any profits split between investors who did not take part. The offer is underwritten by the British Treasury so if no other shareholders take part, the UK government stake will rise to 65%.