Published January 21, 2009

Nationalisation fears maul British banks

Lloyds latest to take a battering; RBS, Barclays languish near their lows

By NEIL BEHRMANN
IN LONDON

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LEADING British bank shares plunged on fears that Royal Bank of Scotland (RBS), Lloyds Banking Group and Barclays were heading towards nationalisation. Sterling tumbled below 1.40 against the US dollar, yen and euro, on worries about chaos within Britain's financial sector.

Chairmen, chief executives and the UK government deny that nationalisation of the faltering banks is likely. But following phase two of the government's banking bailout, the market disbelieves them.

There has been such a wave of selling that share prices have plunged. Hedge funds, following a lifting of the short-selling rule, have been active.

The UK government has already raised its stake in RBS to 70 per cent from 58 per cent and has has a holding in Lloyds Bank following its takeover of stricken mortgage lender HBOS.

Barclays, so far, has not sought capital from the government but analysts and traders believe that it is only matter of time before the government bails it out with a capital infusion.

Illustrating market concerns that there is already creeping nationalisation of the leading banks, RBS plunged two thirds to 10 pence on Monday. Its shares bounced to 13 pence yesterday, but still compare poorly with 53 pence five days ago and around 700 pence in the first quarter of 2007.

Then, in an act of financial madness, it bid for Dutch bank ABN Amro at an exorbitant bubble price and is now suffering from huge losses.

RBS, was worth £75 billion (S$158 billion) only two years ago, but is now valued at £4.5 billion, even though it received £32 billion from taxpayers and shareholders less than three months ago.

Lloyds Bank tumbled by 23 per cent yesterday to a year-low of 49 pence. The price compares with 135 pence five days ago and a peak of 620 pence in 2007. Barclays Bank's shares languished at a year-low of 76 pence yesterday, having fallen from 165 pence in the past five days and from a 2007 peak of 780 pence in 2007 when an RBS consortium defeated it in the bid for ABN Amro.

Market terror of nationalisation following the takeover of Northern Rock last year has hit HSBC and Standard Chartered even though both banks have stated that they have a comfortable capital base and do not require any state aid.

Last year, Standard Chartered wisely held a rights issue as a preventive measure against banking and market turmoil and is well capitalised. But such is the market pressure that HSBC, with large US sub-prime losses, is expected to have a rights issue when market conditions improve.

The scale of losses at RBS has dumbfounded the market and its admission that it had paid between £15 billion and £20 billion too much for ABN Amro last year prompted an angry response from Prime Minister Gordon Brown. George Osborne, the Shadow Chancellor, said that the taxpayer had already lost £17 billion on the government's investments in the banks last October.

He said that in taking its original stake in RBS, the Labour government had not understood what they were buying and didn't appear to know that RBS was preparing to post the largest loss in corporate history.

The government plans to underwrite for a fee 'toxic' debt held by the banks to encourage them to be more ambitious about future lending. The overall package was generally welcomed by business and politicians, but Mr Brown and Chancellor of the Exchequer Alistair Darling were criticised for failing to estimate the potential liabilities for the taxpayer from the toxic debt insurance scheme.

'We need to be absolutely sure that the threat of insolvent banks does not turn into the threat of an insolvent country,' Mr Osborne said.

City analysts believe up to 30,000 jobs could go at both RBS and at Lloyds Banking Group, formed from the merger of Lloyds TSB and HBOS.

Stephen Hester, RBS group chief executive, said: 'What we have to do is make sure our good businesses get stronger and the weaker ones are cut back. But we and all the other banks have to cut our costs - and that includes job losses.'