Published November 4, 2009

RBS, Lloyds to sell branches as price for Bailout 2

Banks barred from cash bonuses for high-earners; Asian banks among likely bidders for stakes

By NEIL BEHRMANN
IN LONDON

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ROYAL Bank of Scotland (RBS) and Lloyds Banking Group are to sell hundreds of branches and key divisions as part of an agreement for receiving a further £40 billion (S$91.5 billion) from the British government.

On the block: Lloyds will sell over 600 branches over the next four years, RBS will sell 318 branches

Northern Rock, the first British bank to collapse in the recent crisis, is also to be sold.

The European Commission has demanded the sales to safeguard banking competition.

Since the banks are under the control of the UK government, which pumped in £37 billion earlier, they have an unfair advantage over competitors.

As part of the accord, the banks are not allowed to pay cash bonuses for the 2009 financial year to any staff earning more than £39,000.

Members of the RBS and Lloyds boards must also defer all their bonuses until 2012.

When the sales eventually take place in three to four years time there will be three new British banks, and local and foreign banks and institutions, including Asian, can either control or have large stakes in them. The sales are expected to take place over a lengthy period so that the assets are not dumped at fire sale prices.

Critics of the planned asset sales say that it falls short of governor of the Bank of England Mervyn King's call for the separation of traditional banking from risky investment banking operations.

Mr King fears the risky casino-like dealings of investment bank proprietary trading units that effectively trade like hedge funds.

RBS will sell 318 branches, while Lloyds will dispose of more than 600 branches over the next four years.

Prior to the sale, RBS will resurrect the brand name, Williams & Glyn's for the more than 300 branches and will also sell its NatWest bank brand in Scotland.

Other divisions up for the auctioneers block are RBS Insurance and Global Merchant Services, its card payment business.

The new arrangement means that RBS will have £45 billion of state funding and be 84 per cent owned by the UK taxpayer. RBS is also making use of the government 'Asset Protection Scheme' of which the government is budgeting to make a £25 billion loss.

Lloyds Banking Group has been instructed to offload Cheltenham & Gloucester, a former building society, with its 160 branches, TSB, the former Trustee Savings Bank that has 200 branches in Scotland, and the Intelligent Finance Internet bank.

By doing so, it will reduce its share of the UK mortgage market and current account market from 30 per cent to 25 per cent.

The Treasury is pumping a further several billion pounds into Lloyds when it takes up its share of a rights issue expected to take place in coming weeks.

Eventually, Lloyds will have received around £20 billion of taxpayer money and be 43 per cent owned by the state.

Prior to an eventual sale, the government is providing more money for Northern Rock which failed in 2007. This is in the form of an £8 billion loan, with a further £4 billion of funding if required.

Northern Rock owns a so called 'good bank', which comprises some £19 billion of deposits alongside £10 billion of secure mortgages and £9 billion of cash.

The rest of the bank, which includes high risk mortgages, will remain under government control for more than 10 years.

Critics complain that a sale of the 'good bank' may receive only £1.5 billion but the risk to the taxpayer is a hefty £27 billion. The European Union has instructed Northern Rock to limit new mortgage lending.

Large British banks such as HSBC, cannot purchase the branches and other assets as this is a European Union pro-competition move. But European, US and Asian banks can make bids, according to information from press conferences yesterday.

Santander, the Spanish bank, German insurance giant Allianz, Generali and Zurich are being mentioned as potential acquirers of RBS and Lloyds branches.

Other potential buyers include Richard Branson who owns Virgin Money, National Australia Bank, the owner of Yorkshire and Clydesdale banks, French banks BNP and Societe Generale and Tesco, which wants to expand into banking.