U.K. May Own 30 Percent of Big Banks in Bailout Plan

U.K. May Own 30 Percent of Big Banks in Bailout Plan

Oct. 9 (Bloomberg) -- The British government may own as much as 30 percent of four of the country's biggest banks as it doles out the 50 billion-pound ($87 billion) lifeline announced yesterday, according to analysts at Sanford C. Bernstein Ltd.

Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling offered to buy preference shares to help boost capital at Royal Bank of Scotland Group Plc, Barclays Plc, Lloyds TSB Group Plc, HBOS Plc and four other lenders in the unprecedented rescue plan. It also guarantees about 250 billion pounds of loans and increases the amount the Bank of England makes available to at least 200 billion pounds.

``The proposed injection leaves the U.K. banks in a strong solvency position,'' London-based Bernstein analysts including Bruno Paulson wrote in a note to clients today. ``The downside is of course that the capital raising implies dilution, with the government potentially taking 20-30 percent of the banks.''

Governments around the world are trying to coordinate efforts to reopen the banking system, with U.S. Treasury Secretary Henry Paulson indicating his $700 billion rescue plan may include investing in lenders. While banks rose in European trading today, the bailouts have yet to unlock money markets. The benchmark London interbank offer rate continued to rise, even after central banks announced a coordinated rate cut yesterday.

RBS, Britain's third-biggest bank, gained 18 percent to 106.7 pence at 10:20 a.m. in London. HBOS Plc, the country's biggest mortgage lender, rose 31 percent to 153 pence, and Lloyds TSB, the U.K. bank that agreed to buy HBOS, added 8.3 percent.

Rebound

Today's rebound reduced RBS's decline for the week to 43 percent. ``In the case of RBS, the price fall in the last fortnight is far higher than the potential dilution from the government plan,'' Paulson wrote.

Banks worldwide need more capital to offset losses. They posted $592 billion of writedowns since the credit crisis started last year, more than the $442.5 billion of new capital they raised, according to data compiled by Bloomberg.

RBS may get as much as 8 billion pounds out of the 20 billion pounds that Bernstein predicts the government will invest in the four lenders. Barclays and HBOS may also need 5 billion pounds each from the government, Bernstein said. Lloyds TSB may need 2.5 billion pounds.

The U.K. would hold up to 35 percent of RBS, a quarter of Lloyds and HBOS stock, and a fifth of Barclays if the banks need to sell shares to the government.

`Significantly Ease'

London-based HSBC Holdings Plc, Europe's biggest bank, said yesterday it doesn't plan to receive capital from the U.K. because it has sufficient funding. Standard Chartered Plc, the London- based bank that makes most of its profit in Asia, and Abbey National, the U.K. unit of Spain's Banco Santander SA, also said they won't seek capital from the government.

The government guarantees should ``significantly'' ease both short- and medium-term funding concerns, according to Bernstein.

For now, lenders are hoarding cash. The cost of borrowing in dollars overnight in London jumped 1.44 percentage points yesterday to 5.38 percent. The rising Libor, set each day in London, means higher payments on financial contracts valued at $360 trillion -- or $53,500 for each person worldwide, including mortgages in Britain and student loans in the U.S.

Central banks from the U.S. to England and China cut interest rates yesterday in an attempt to restart the flow of credit and prevent a global recession.

While the government plan will increase capital at U.K. banks, analysts at Goldman Sachs Group Inc. cut their price targets today for RBS, Barclays, HBOS and Lloyds TSB.

Dividend Payout

``It is clear that dividend payout ratios will be cut as part of the conditions for utilizing the facilities provide by the government,'' said London-based analysts led by James Chappell.

The U.K. rescue plan also means RBS may no longer need to sell its insurance unit, Chappell said.

BLOOMBERG