Shares in Royal Bank of Scotland, Lloyds TSB and HBOS have fallen sharply despite the UK government’s £37bn rescue package for the three banks.

The plan is meant to secure the banks’ futures, but it also means profits will have to be shared with the government.

In addition, the injection of taxpayers’ money will mean that the banks will not be paying dividends to their shareholders.

HBOS closed down 27.5%, Lloyds TSB was 14.5% lower and RBS down 8.4%.

BBC business editor Robert Peston said the banks faced “absolute humiliation”.

It would “count as perhaps the most extraordinary day in British banking history”, he added.

Paul Kavanagh, at the brokers Killik & Co said: “It’s good news for the banking system, but it’s not necessarily good news for share prices of the banks”.

“One thing the banks have had to concede is to stop paying dividends. Many bank shareholders are the big income funds and they’ve been selling them today.”

‘Extraordinary times’

RBS will receive £20bn of taxpayers’ money with a further £17bn to be put into HBOS and Lloyds TSB. Barclays intends to raise £6.5bn without government help.

“It’s immensely regretful we’re coming to shareholders to raise funds again, it’s something we feel bad about” Sir Tom McKillop RBS chairman

Taxpayers will own about 60% of RBS and 40% of the merged Lloyds TSB and HBOS.

The government will also get a say in how the three banks are run, and executives will see their cash bonuses limited or forbidden.

Chancellor Alistair Darling told MPs that the rescue package contained: “essential steps in helping the people and businesses of this country and supporting the economy as a whole”.

Prime Minister Gordon Brown said the bail-out was: “unprecedented but essential for all of us”, and would thaw frozen money markets.

“In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about,” he added.

‘Surgical approach’

Mr Brown insisted the investments were assets and, “not just money being pumped in”, adding the government intended to sell the investments at some point.

The measures needed to be accompanied by international banking system reforms, he added.

“We must now put in place new structures and new rules for the future. This cannot simply be a short-term rescue to paper over the cracks. Only a surgical approach that gets to the root of the problem will now work to ensure the problems do not return.”

The Treasury cash forms part of the government rescue plan announced last week.

Management shake-up

As part of the banks’ announcements:

– RBS said chief executive Fred Goodwin was quitting with immediate effect – without a severance pay-off. He will be replaced by British Land boss Stephen Hester. RBS chairman Tom McKillop is to retire.
– Lloyds and HBOS said they had renegotiated their merger, reducing the number of Lloyds TSB shares that HBOS shareholders will receive.
– HBOS chief executive Andy Hornby and chairman Lord Dennis Stevenson said they would stand down from their posts after the merger with Lloyds TSB was complete. Neither will take any extra payments when they leave.
– RBS and Lloyds TSB/HBOS will return mortgage and small-business lending to 2007 levels, which is much more than they are currently lending.

“It’s not wrong to call it nationalisation but it’s very different from Northern Rock. Shareholders will continue to own a big chunk of the banks” Robert Peston BBC Business Editor

Other developments included:

– Major central banks saying they would offer financial institutions an unlimited amount of short-term dollar loans to help stem the crisis.
- London’s FTSE 100 index rising by about 5% as investors reacted to the news, though banking shares were mixed.
– As a condition of the deal, the government has insisted that senior directors should get no cash bonuses this year, with future bonuses to be paid in the form of shares – a move aimed at encouraging management to take a more long-term approach.

Dividend cancelled

The government will buy £5bn of preference shares in RBS and another £15bn of ordinary shares if, as many expect, the bank is unable to find willing private investors.

BANKS AND THEIR BAIL-OUTS
RBS – £20bn (government takes 60% stake)
Lloyds TSB/HBOS – £17bn* (government takes 40% stake)
*dependent on merger being completed

Check UK bank shares

“It’s immensely regretful we’re coming to shareholders to raise funds again, it’s something we feel bad about,” said RBS chairman Sir Tom McKillop. “We cannot help but feel contrition.”

HBOS will raise £11.5bn from taxpayers, made up of £8.5bn in ordinary shares and £3bn in preference shares, while Lloyds TSB is to get £5.5bn.

The money is conditional on the merger of the banks going through.

Lloyds TSB and HBOS said the deal was still on, but that the terms had been renegotiated.

A £12.2bn deal was agreed last month, but the value of HBOS shares has since plunged and the extent of the recapitalisation has highlighted its weakness.

Under the revised deal, HBOS shareholders will get 0.605 Lloyds TSB shares for every HBOS share they hold. Under the original deal they would have received 0.83 Lloyds TSB shares.

‘No Rock’

Barclays has said it is to raise £6.5bn of new capital. The bank is to raise the money from private investors, rather than going to the government.

Barclays also said it would scrap its final dividend payout for 2008, saving it £2bn.

Our business editor said it was not wrong to describe the part-ownership of RBS, Lloyds TSB and HBOS as nationalisation, but the situation was very different from Northern Rock and Bradford and Bingley, which had seen private investors lose their holding.

“Shareholders will continue to own a big chunk of the banks,” he said.

News reported by The BBC

The City regulator has announced restrictions on short-selling, whereby traders bet on share prices falling, in a bid to tackle market instability.

The Financial Services Authority (FSA) is clamping down on the practice that some believe contributed to the sharp falls in HBOS shares in recent days.

Some analysts argue that short-selling was a factor that led to the £12.2bn takeover of HBOS by Lloyds TSB.

The changes will be effective from midnight on Thursday.

The restrictions, which will be in force until 16 January 2009, will be reviewed after 30 days.

“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” said FSA chief executive Hector Sants.

“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures” Callum McCarthy Financial Services Authority chairman

‘Financial stability’

Short-selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.

The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

Anyone can short a position in a company’s shares, but typically hedge funds are the main players.

Chancellor Alistair Darling welcomed the move by the FSA.

“I believe it is the right thing to do in the current market conditions and in the interests of financial stability,” he said.

Markets have fluctuated hugely in recent days, with fundamental changes occurring in the financial landscape.

There are fears that several firms, including Lehman Brothers, which filed for bankruptcy at the start of the week, and insurance giant AIG, which was rescued by the Federal Reserve, were targeted by those short-selling.

Speaking to the BBC, Mr Darling underlined that short-selling was not wrong in itself.

“It can help actually in providing funds, liquidity, for companies.”

But he added that it could become a problem where people “deliberately” manipulate a market, making “a difficult situation even worse”.

Callum McCarthy, chairman of the Financial Services Authority, expressed concerns over recent volatility.

“There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues.”

Broader moves

It was not only in the UK that attempts were being made to address short-shelling.

The US financial regulator, the Securities and Exchange Commission (SEC), also announced restrictions on short-selling on Wednesday.

And on Thursday, New York attorney general Andrew Cuomo said he would start a probe into short-selling.

At issue is whether certain traders exploited short-selling to push down stock prices, breaching market rules.

New York’s state pension funds said it would cease lending stocks in 19 firms to short-sellers on a temporary basis.

News reported by The BBC

The future of thousands of jobs is in the balance in the wake of Lloyds TSB’s £12.2bn takeover of Halifax Bank of Scotland (HBOS).

While Lloyds dismissed claims that up to 40,000 jobs faced the axe as “ridiculous”, it refused to rule out compulsory redundancies.

The takeover will lead to cost savings of more than £1bn, Lloyds added.

Meanwhile the global markets were calmer after central banks pumped billions of dollars in extra funds.

The UK government also said it is “determined” to ensure the stability of the financial system and protect savers.

Gordon Brown pledged to “do everything to protect depositors in Britain, who need to have confidence in the banking system”.

The takeover by Lloyds TSB values shares in HBOS at 232p each.

By close of trade in London on Thursday, when the deal was announced, shares in HBOS closed up 17%, at 172p, while Lloyds shares shed 17.7% to 253p.

Turmoil

The deal comes as a crisis of confidence on global financial markets has wreaked havoc in recent days:

Gordon Brown said the decision was ‘right’

– A lack of funding has forced global central banks to pump billions of extra dollars into money markets
Russia’s main stock markets have been suspended for two days in a bid to prevent a meltdown after steep falls in share prices
– Banks around the world have admitted they could lose millions after the collapse of US investment bank Lehman Brothers
– The Federal Reserve rescued AIG with an $85bn (£48bn) package amid fears the group, once the world’s largest insurer, could collapse
– Bank of America bought investment bank Merrill Lynch in a $50bn deal earlier this week, another sign of the upheaval of the financial sector
– Meanwhile, the UK’s economic picture remain glum, with latest figures showing mortgage lending slumped again in August
– US President George W Bush sought to soothe nerves by announcing that authorities would closely monitor markets
– The UK’s Financial Services Authority has announced steps to restrict short-selling of shares

Deal welcomed

Effectively the buy-out of HBOS is a rescue deal after its shares plummeted recently amid concerns over the firm’s future.

Under the terms of the deal – which must be agreed by shareholders – HBOS shareholders will receive 0.83 Lloyds shares for every HBOS share.

LLOYDS vs HBOS
Branches – Lloyds 1,900; HBOS 1,100
Customers – Lloyds 16 million; HBOS 22 million
Employees – Lloyds 70,000; HBOS 72,000
Savings – Lloyds is the UK’s fourth largest savings bank; HBOS is the market leader
Retail savings balance – Lloyds £65bn; HBOS £139bn

“This will be a unique opportunity to accelerate and extend our strategy and create the UK’s leading financial services group,” said Lloyds chairman Sir Victor Blank.

Lloyds chief executive Eric Daniels said “You have the largest savings bank, you have the largest current account provider, you have two terrific distribution networks.”

According to the deal agreement “significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS”.

Under the cost saving plan retail branches will be cut, while head office posts, human resources and finance and legal departments will also face cuts.

Analysts have suggested that up to 40,000 jobs could go, but banking consultant Jonathan Charley said HBOS was under pressure not to make such deep cuts.

He estimated that 10% of the combined workforce, or about 14,000 posts, could be cut.

Competition fears

BBC business editor Robert Peston said the government had opted to push through the Lloyds TSB-HBOS tie-up after HBOS voiced concerns that depositors and lenders had begun to withdraw their credit from the bank.

Declan Curry goes through the main points of the deal

Earlier Chancellor Alistair Darling said the government would allow the HBOS-Lloyds TSB deal because financial stability “must trump” competition fears.

But he denied that the authorities had rushed through the transaction.

“It didn’t just suddenly happen,” he told the BBC.

City watchdog, the Financial Services Authority (FSA) welcomed the merger saying it would “enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector”.

“I’m worried by banks merging. Too much money in one pot is dangerous.” Stephen, London

Send us your commentsConcerns about HBOS’s security were so great that even the prime minister was involved in pushing through the deal, our business editor said.

“There were growing concerns in the HBOS boardroom that a climate of fear was being created about its future that could have led to a funding crisis, or a Northern Rock-style run – on steroids,” he said.

Market leader

Meanwhile, Mr Daniels – who will take over the helm of the new firm – was keen to stress that the takeover had not been forced on HBOS.

“There shouldn’t be any impression this is a shotgun marriage or a forced marriage, this is something that’s been looked at for a good long while,” he said. This is the right transaction for HBOS and its shareholders

Dennis Stevenson, HBOS chairman

Lloyds added that the takeover was part of its strategy to build “the UK’s leading finance company”, adding that it also intends to increase the number of competitive mortgages on offer for first-time home buyers.

The creation of such a large bank, which will hold a third of the UK mortgage and savings market, would not normally be allowed under competition rules say analysts.

But the deal was backed by the government, using a special national interest clause, on the grounds that a collapse of HBOS would have had a disastrous impact on the UK.

However, Lloyds chairman Sir Victor Blank did say the Office of Fair Trading would look “very carefully” at the business if it discovered any market abuses in the future.

Scottish focus

The group also moved to allay fears that the takeover would mean a blow to Scotland where HBOS is currently based.

Lloyds said the new group would continue to use The Mound – HBOS’s corporate headquarters – in Scotland, continue to hold annual general meetings in Scotland and carry on printing Bank of Scotland notes.

“In addition the management’s focus is to keep jobs in Scotland,” it added.

HBOS chief Andy Hornby will remain with the company, but his role has not been decided.

“Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector.

News reported by The BBC

A £400m rights issue at Bradford & Bingley (B&B) has closed, with analysts expecting that some of the deal’s underwriters will end up with shares.

Shares in B&B were trading at 55.25p when the deadline for the cash call finished on Friday – just above the 55p offer price for existing investors.

The take-up is forecast to be modest – though higher than the 8% seen last month in a rights issue by HBOS.

B&B, a buy-to-let loans specialist, has been hit hard by the credit crunch.

It is not expected to reveal how many shareholders took up the offer to buy extra shares until Monday.

The rights issue was underwritten by banks including Citi and UBS, along with HSBC, Lloyds TSB, HBOS, Barclays, Abbey and the Royal Bank of Scotland.

WHAT IS A RIGHTS ISSUE?
Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

Rival cash calls

B&B’s rights issue has been restructured twice. The bank first announced an attempt to sell shares at 82p in May. Then, as trading took a turn for the worse, B&B announced it had decided to sell a 23% stake in the firm to Texas Pacific, but the private equity firm later backed out.

Earlier this year the Royal Bank of Scotland raised £12bn from its shareholders with a strong take-up in its rights issue.

Meanwhile Barclays has secured £4.5bn in new funding from a range of foreign investors.

Barclays announced last month that 19% of its new shares had been taken up by existing investors.

News reported by The BBC

Lloyds TSB has suffered a sharp drop in profits in the first six months of the year after a fall in the value of its assets due to global financial turmoil.

Profit before tax was 70% lower at £599m ($1.18bn), compared with a profit of £1.99bn in first half of 2007.

Excluding the impact of a decline in financial markets on its investments, Lloyds TSB said businesses, especially retail banking, had performed well.

It increased its shareholder dividend by 2% to 11.4 pence per share.

“The first half of 2008 has been a period of considerable turbulence for the financial services sector,” said chairman Sir Victor Blank.

“A fall of 70% or almost £1.4bn in its pre tax profits for the first half of the year is something of a shock” Robert Peston, BBC Business Editor

That market turbulence has contributed to more than a billion pounds being wiped off the value of its investments and its insurance businesses, including Scottish Widows, Lloyds TSB said.

The credit crunch caused £505m to be wiped off the value of its insurance business due to the fall in the value of its stock market investments.

A further £585m was lost due to a fall in the value of other assets, including those linked to the debt markets such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs).

Speaking to reporters, the company asserted that, unlike other banks, it had no investments related directly to the US sub-prime mortgage market whose value has collapsed. Sub-prime lenders provide financing to companies or individuals with poor or non-existent credit histories.

Lloyds TSB also pointed out that excluding the impact of market volatility, its profit before tax had risen by 11% to £2.16bn.

However, BBC business editor Robert Peston warned that the 70% fall in profits was a worrying possible augury of the problems other UK banks may disclose as they report their results.

Housing slowdown

Looking to the future, Lloyds TSB said it expected the slowing growth of the UK economy to hit its business.

The group said it had won almost of quarter of all new lending in the mortgage market in the first six months of the year. It also opened half a million new current accounts.

However, Lloyds said it expected house prices to fall by up to 15% this year. Were prices to fall by 12.5%, it said by way of an example, this would wipe £100m off the value of its mortgage loans.

News reported by The BBC

Shares in some of the UK’s leading banks have risen strongly on the back of takeover rumours and hopes of a recovery in the financial sector.

HBOS, the UK’s biggest mortgage lender, jumped 16.9% on talk that it could be a takeover target for Spanish bank BBVA.

Both HBOS and BBVA declined to comment on the rumours.

Among other UK banks, shares in Royal Bank of Scotland were up 11.2%, Barclays added 11.8% and Lloyds TSB shares were trading 8.3% higher.

Raising funds

On Monday, HBOS had revealed that its £4bn fund-raising rights issue had been snubbed by investors.

Initially only 8.3% of the new shares offered were taken up, although a further 30% were taken up on Monday, leaving the rest with the issue’s underwriters.

HBOS is not the only UK bank to have sought extra funds to strengthen its balance sheet as the fallout from the credit crunch continues.

The Royal Bank of Scotland has raised £12bn while Barclays has secured £4.5bn in new funding from a range of foreign investors.

Spain’s BBVA is currently focused on the Spanish and Latin American markets. It employs 95,000 employees, has 35 million customers and operates in 32 countries.

Last week, Spanish rival Santander agreed to buy UK bank Alliance & Leicester for £1.2bn.

News reported by The BBC

Halifax, the UK’s largest lender, on Friday brought momentum to the trend of falling mortgage rates as it cut the cost of a number of deals for the second time in a week.

The bank reduced its two- and five-year fixed rates by up to 15 basis points. Other brands within the HBOS group – BM Solutions, Bank of Scotland (BoS) and Intelligent Finance – also cut a number of rates, including on some buy-to-let and self-certification loans.

The changes will go some way to reassuring borrowers that mortgage rates should start to improve over the next few months. Other lenders, including Nationwide, Lloyds TSB, Abbey and Woolwich, have also launched cheaper deals in the past couple of weeks. Nationwide reduced some of its rates by as much as 30 basis points.

But brokers said it was still too soon to call the peak in mortgage rates.

“Certainly for the first time in 12 months we are seeing lenders jockeying for business rather than pulling away, and we are talking about major lenders through to smaller lenders,” said David Hollingworth at broker London & Country Mortgages. “But we have to be hesitant about saying all rates will continue to get better.”

Swap rates, which underpin the cost of short-term fixed lending, have fallen fairly rapidly in recent weeks, triggering the reduction in fixed mortgage rates. But any renewed rise in swap rates, if inflation continued to go up, for example, could mean lenders increase rates again.

Brokers said the fact that a number of banks were moving rates downwards, and showing more of an appetite to lend, was still good news for homeowners.

In recent months lenders that have launched reasonably competitive mortgage rates have rapidly been inundated with business and forced to pull the deals, sometimes within days. But as more banks lower rates the balance between supply and demand should even out and the best rates should be available for longer.

Nationwide is now offering a two-year fixed rate of 6.18 per cent, with a fee of £599 ($1,197), while Lloyds TSB and Halifax are offering two-year rates of 6.34 and 6.47 per cent respectively. The best deals are only available for borrowers with deposits of at least 25 per cent. Those with smaller deposits are still having to pay much higher rates, and are unlikely to see any improvement soon.

For borrowers who do not need the security of guaranteed mortgage payments, two-year tracker rates can be found from 5.49 per cent, according to Moneyfacts.co.uk.

Battle for savings ends as top fixed-rate offers pulled

The top two fixed-rate savings deals have been withdrawn just weeks after launch, in a sign that lenders are no longer battling for customers’ cash to offset the tightened credit market, writes Elaine Moore.

The Bank of Cyprus withdrew its 7.15 per cent savings bond yesterday following Birmingham Midshires’ move to end its 7.17 per cent offering on Thursday. Others are likely to follow suit and analysts said the action was likely to spell the end of 7 per cent plus short-term bonds.

Savings providers have competed fiercely to outbid each other to the top of the savings rates table in recent months in an effort to secure ever-higher levels of funding from customers. The desire for retail cash inflow is a result of the difficulties faced by banks and building societies to obtain funding from the wholesale market.

The withdrawal of the top two rates could be a sign that providers have overreached themselves, said Kevin Mountford, head of savings at price comparison site moneysupermarket.com.

“It had to happen sooner or later,” he said.

>News reported by The FT