RBS/Lloyds: The UK’s two big state-owned banks may be in for a re-branding. Royal Bank of Scotland and Lloyds Banking Group could end up being the country’s largest private equity firms.
Equity deals of a sort keep flowing in to the two lenders, which control about 50 per cent of the domestic market between them. In the last few days, Lloyds swapped £600m of loans to pub operator Admiral Taverns for a near-50 per cent stake. These unwanted shareholdings join a collection of shareholdings built up when credit was easy. HBOS, now part of Lloyds, was particularly fond of equity kickers on loans.
Standard banking practice is to get rid of shareholdings as quickly as possible, even at a loss. There are three reasons to hesitate this time. First is the scale of losses — 12 per cent of HBOS’s £116 billion of corporate loans were in default in 2008. Second, the two banks don’t feel much pressure right now — RBS because its losses are capped by the state, and Lloyds because it has raised enough private capital to survive losses which it thinks have now peaked.
Finally, there may be a smarter solution. Private equity groups, housebuilders and big property companies have all been meeting the two banks recently to investigate setting up joint ventures.
One option could be for Lloyds, for example, to consolidate all its pub companies and give a 20 per cent stake to a buyout firm. In return, the bank would get cash to grow the business and management nous — of which there is an unsurprising lack at a part-nationalised bank. Both sides could eventually sell out at a profit.
It sounds neat. But private equity companies will want as big a stake as possible in return for injecting life into the zombie companies. Politically, though, surrendering much of the upside would be a tough sell, especially to a private equity vulture.
More generally, the government seems minded to make its banks less exotic, not more. It would prefer to see RBS focus on banking, not morph into a private equity titan — especially one whose recovery could be stunted by having to hold more capital against riskier equity stakes. Some tough negotiations lie ahead.
