The government has begun to nationalise the UK banking system by injecting £37bn into three of the country’s biggest banks.
The historic step could end up with Gordon Brown’s government owning a majority stake in Royal Bank of Scotland, one of the world’s biggest banks, and more than 40 per cent of the combined Lloyds TSB and HBOS, which is set to be the country’s largest mortgage lender.
RBS, Lloyds TSB and HBOS have agreed to scrap their dividend payments as part of the government plan which will result in the UK banks being some of the best capitalised in Europe.
Under the terms of the bailout, Royal Bank of Scotland, Lloyds TSB and HBOS will be prevented from paying dividends on ordinary shares until they have repaid in full a total of £9bn in preference shares they are issuing to the government. Barclays, which is hoping to avoid government support by raising around £6.6bn from private investors, has scrapped its final dividend for 2008 in a move designed to save £2bn.
News of the tough new dividend policy – imposed by the Treasury during negotiations over the weekend – makes it less likely that existing shareholders in RBS, Lloyds TSB and HBOS will take the opportunity to buy back some of the ordinary shares that the three banks are placing with the government .
If existing shareholders do not buy back any shares, the government is likely to end up with a controlling stake of around 60 per cent in RBS and 43.5 per cent of the combined Lloyds TSB and HBOS, which are pressing ahead with their merger after revising the terms of the deal.
Gordon Brown defended his government’s “unprecedented but essential” decision on Monday morning, saying the effective partial nationalisation was intended to be temporary only.
The British prime minister stated that he expected other countries to follow suit. “I think we’ll find in Europe over the next few days ... the same things are going to happen,” he said as eurozone countries began to announce their own rescue packages.
Mr Brown said the state had a duty to “be the rock of stability” and act to prevent systemic failure of the banking system. “In extraordinary times, our financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about,” he told a press conference in Downing Street.
Earlier Alistair Darling, the chancellor, told the BBC Today programme, ”the reason we are doing it is because this is the only way, when markets are not open to certain banks, they can get the capitalisation they need, this is the government’s only intervention here.”
News of the bailout comes after a frantic weekend of negotiations between the banks and Treasury officials, triggered by the continued strains in the credit markets at the end of last week. The capital increases were triggered after the Financial Services Authority, the city watchdog, forced the banks to submit their business models to harsh stress tests to make sure they could weather even a severe recession.
In return for government support, RBS, Lloyds and HBOS will be submitted to new controls. The Treasury is expected to appoint 3 new RBS directors and 2 directors to the board of the combined Lloyds-HBOS.
The banks will also face restrictions on executive pay, and have agreed to pay their 2008 executive bonuses in the form of shares. The banks have also committed to carry on lending to home buyers and small businesses.
Royal Bank of Scotland is raising £20bn in a placing of ordinary and preference shares that could leave the government holding a majority stake in Britain’s second-largest bank.
RBS confirmed the departure of Sir Fred Goodwin as chief executive, to be replaced by Stephen Hester, the former banker who is chief executive of British Land. Sir Tom McKillop, RBS’s chairman, is also expected to step down at the bank’s annual meeting in April 2009.
Johnny Cameron, head of RBS’s investment banking operations, will leave the board though he is expected to stay on in a senior client role.
Sir Tom said: ”We regret having to raise capital but believe that decisive action is necessary in this unprecedented market environment.”
RBS said it would raise £15bn by placing ordinary shares at a price of 65.5p – less than a third of the price at which the bank issued shares at the time of its rights issue in April. If shareholders do not take up their rights to new shares, the British government will hold a controlling stake in RBS. The bank said the Treasury would ”work with” the board to appoint three new non-executive directors.
The bank also signalled it would scale back its investment banking operations in order to concentrate on risk management, financing and transaction banking services, while scaling back its capital-intensive businesses.
RBS will also raise £5bn from the government by issuing preference shares which carry a fixed interest payment of 12 per cent. The bank signalled it would not pay any dividends on ordinary shares until the preferred shares have been repaid.
The capital increase will boost RBS’s Tier One capital ratio by around 4 percentage points.
Shares in the bank were down 30 per cent at 50p in early trading.
Lloyds TSB and HBOS, meanwhile, set out plans to raise a total of £17bn in fresh capital in a placing of ordinary and preference shares that could leave the government holding as much as 43.5 per cent of the combined bank.
At the same time, the banks restructured the terms of their all-share merger in order to give Lloyds shareholders a better deal. HBOS shareholders will now receive 0.605 Lloyds TSB shares for every one they own, down from a ratio of 0.83 agreed when the merger was announced last month.
Following the FSA’s scrutiny of the banks’ capital reserves, HBOS agreed to raise a total of £11.5bn, of which £8.5bn will be in the form of ordinary shares placed at a price of 113.6p per share. In addition, the bank will raise £3bn by issuing preference shares to the government.
Lloyds TSB, meanwhile, is raising a total of £5.5bn, of which £4.5bn will be in ordinary shares at a price of 173.3p per share, with the remaining £1bn in preference shares. Shares in Lloyds TSB rose 5.5 per cent to 199.8p, while HBOS shares fell 21 per cent to 98p.
Barclays set out plans to boost its capital by up to £10bn by issuing shares and scrapping its final dividend, but said it would do so without asking the government for help.
The bank plans to raise £3bn by issuing preference shares before the end of the year, while raising a total of £3.6bn in ordinary shares before March 2009.
The bank, which recently bought the US operations of Lehman Brothers, the failed Wall Street investment bank, indicated it will not pay a final dividend for 2008, saving a further £2bn. It will also add a further £1.5bn to equity by tightening the management of its balance sheet and cutting costs.
Barclays said it had already agreed in principle with an existing shareholder to raise £1bn in new capital. The actions, triggered by the FSA’s demands that British banks have sufficient capital to weather a severe economic downturn, will raise in excess of £6.5bn of Tier One capital, giving Barclays a pro forma Tier One ratio of more than 11 per cent. Barclays rose 12.5 per cent to 233.½p.
However, Barclays signalled that, if it was not able to raise the new capital privately, it would be able to raise fresh cash from the government. ”The terms of such facilities would be negotiated at the time and may be on terms less favourable than those made available today,” Barclays said.
Santander, the Spanish bank which owns Abbey National in the UK, and which last Friday completed its purchase of Alliance & Leicester, said it was on Monday injecting £1bn of extra capital into its UK business. That would increase the tier 1 ratio from about 8 per cent to 9.25 per cent as at the end of 2008.
It said this was in line with its commitment under the UK government’s banking support scheme announced last week. It reiterated its intention not to seek funding from the government.
Santander also confirmed speculation that it was in talks to buy Sovereign Bank, the US lender based in Pennsylvania in which it has a 25 per cent stake.
The FTSE 100 rose 4.8 per cent to 4119.9, an increase of 187 points, on the news.
Additional reporting Jim Pickard
