The worst is behind us. Lloyds chief executive Eric Daniels’ mantra sums up his take on almost every aspect of the bank’s ill-fated acquisition of Halifax Bank of Scotland. Now for the latest journey: leading Lloyds to independence from the government that bailed it out. Unlike Royal Bank of Scotland, it will not tip its bad loans into the government’s asset protection scheme, so saving £15.6bn of capital in ‘B’ shares issued solely to cover the state’s insurance premium. That fee increasingly looked steep, given that Lloyds no longer expects to make claims – or not that many. Furthermore, its run rate of impairments slowed in the third quarter, supporting the optimistic outlook in Mr Daniels’ rear view mirror.

Lloyds will try to quell investor concerns over its bad loan performance through the recession with a £13.5bn rights issue – the world’s largest – that will lift its core tier one capital ratio 230 basis points to 8.6 per cent. The cash call will be priced later this month, but is likely to be at a now standard discount of roughly 40 per cent to the theoretical ex-rights price. To be safe, Lloyds will issue £7.5bn of “contingent convertibles” that automatically turn into ordinary equity if its core capital ratio drops below 5 per cent. To be safer still, it should sell Scottish Widows.

There is a further price to be paid for prime minister Gordon Brown’s maiden outing as a mergers and acquisitions dealmaker. Though competition rules were waived to help Mr Daniels create a bigger bank, Brussels requires Lloyds to shrink again. The remedies are lighter than if Lloyds had joined the APS. Even so, selling branches, reducing assets and other initiatives will shave about £500m off pre-tax profits, though branch closures and asset shrinkage were already on the cards. Beware M&A advisers pitching deals should be Mr Daniels’ next mantra.

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