RBS Sacrifices More Than Lloyds to Get Biggest Banking Bailout

By Jon Menon

Nov. 4 (Bloomberg) -- Royal Bank of Scotland Plc will sacrifice more than Lloyds Banking Group Plc to secure its bailout by the British government.

RBS said yesterday that asset sales and limits on its banking activities imposed by its rescue may curb pretax profit by 1.1 billion pounds ($1.8 billion) a year. Lloyds’s bailout, also announced yesterday, will erase about 500 million pounds of pretax profit, finance director Tim Tookey told analysts on a conference call.

Lloyds Chief Executive Officer Eric Daniels is raising money from institutional investors to avoid insuring the bank’s riskiest assets with the government. The bank said yesterday that loan impairments will drop in the second half. By contrast, Stephen Hester, RBS’s CEO, will insure 282 billion pounds of assets through the U.K.’s Asset Protection Scheme.

“RBS has been more severely treated,” said Robert Talbut, who helps manage about 32 billion pounds at Royal London Asset Management. “The earnings power of the new group has been pretty severely diluted.”

RBS fell 7 percent to 35.93 pence in London trading yesterday, for a market value of 20.3 billion pounds. Lloyds rose 2.7 percent to 87.33 pence.

RBS agreed to sell its Churchill, Direct Line and Green Flag insurance units, its commodities trading unit and 318 branches in return for 25.5 billion pounds of state aid, the Edinburgh-based bank said in a statement. The units on sale generated about a fifth of RBS’s revenue in 2008. In return, RBS secured the costliest bailout of a bank in the world.

EU Pressure

The European Union is forcing banks that had government help to sell assets to stop them having an unfair advantage and boost competition. Last month, it forced ING Groep NV, the biggest Dutch financial services company, to sell its insurance units to win approval for a bailout. By contrast, U.S. regulators have provided financial assistance to banks that expanded during the crisis through acquisitions.

“It’s far more onerous for RBS,” than Lloyds, said Joe Dickerson, an analyst at Execution Ltd. in London who has a “sell” rating on RBS and a “buy” on Lloyds. “Visibility on the earnings prospects of RBS is very low.”

Both RBS and Lloyds yesterday agreed they won’t pay cash bonuses to workers earning more than 39,000 pounds a year. RBS will also be banned from being ranked higher than fifth in debt league tables as one of the conditions of its bailout. RBS is the top arranger of company bonds in Bloomberg’s Euromarket Corporates league table, beating Deutsche Bank AG.

Bonus Curbs

The bonus decision will place RBS’s investment bank at a “material disadvantage,” Dickerson added. The asset sales will also make it harder for the bank to raise capital, he said.

CEO Stephen Hester is unwinding acquisitions made by his predecessor, Fred Goodwin, who helped lead RBS through $140 billion of takeovers, swelling the balance to 2.2 trillion pounds, exceeding Britain’s annual economic output.

The “one positive” for RBS is it wasn’t forced to sell its Citizens Financial Group unit in the U.S., said Danny Clarke, a Liverpool-based analyst at Shore Capital Group Plc. “They will be grateful to hold onto it.”

Lloyds, which kept the government’s stake at 43 percent, will also sell 600 branches to gain EU approval for state aid. The outlets will include 164 Cheltenham & Gloucester branches it had earmarked for closure in June, a decision it reversed in August. The bank also planned to cut branches to reduce costs by more than 1.5 billion pounds after its acquired HBOS Plc, the U.K.’s biggest mortgage lender in January, according to analysts.

‘Greatest Triumph’

“The greatest ‘triumph’ of this entire episode for Lloyds is probably the capitulation by Brussels, possibly assisted by the U.K. government, apparently choosing to give Lloyds special treatment in comparison with other state-aided banks,” wrote Ian Gordon, an analyst at Exane BNP Paribas SA in London. Lloyds will sell assets “it might well have chosen to sell anyway.”

“We have neither sought nor received special treatment,” Lloyds spokesman Shane O’Riordain said in a telephone interview. “We believe we had a fair an appropriate deal.”

Lloyds will relinquish 4.6 percentage points of its 30 percent share of the U.K. current account market. Officials at the bank declined to comment.

“In terms of what would have happened had we entered into the APS, what we do know from Europe, we received very specific guidance that the remedies would have been more, considerably more,” Daniels told analysts yesterday.

RBS will be forced by the EU to reduce its market share in retail banking by 2 percentage points and SME banking by 5 percentage points. The bank had a 20 percent market share of current accounts, 10 percent of savings and 6 percent of mortgages at the end of 2008, Hester said in a presentation last month.

“The damage in the long term is much more severe at RBS than Lloyds,” said Richard Champion, who helps manage about $2 billion at Principal Asset Management in Sevenoaks, England.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net