Lloyds bank to raise $34bn

London - Britain pressed ahead on Tuesday with a fresh wave of restructuring in its crisis-ravaged banking system, as Lloyds sought at least £21bn ($34.2bn) through a record share issue and debt swap.

Another bailed-out financial institution, Royal Bank of Scotland, said it would get a further £25.5bn from the government and sell assets to comply with conditions for state aid.

Both banks agreed to curbs on bonuses, the Treasury said, describing its new conditions for taxpayer support as a sign conditions in the financial sector had improved.

The government said it was using its ownership stakes in the banks - gained in return for earlier bailouts - to strengthen their finances, reduce risks to the taxpayers and ensure competition and consumer protection in the industry. Under urging from European Union competition authorities, the government has made it clear bailed out banks will have to sell and restructure some of their businesses in return for aid.

"The news is potentially good for both UK consumers and rival banking groups, although more debatable for both Lloyds and RBS shareholders," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.

"UK consumers will in theory enjoy increased choice and lower pricing, while rivals such as HSBC will be glad to see their rivals paying for their mistakes."

Shares in Lloyds Banking Group shares rose 4% to 88.41 pence on the London Stock Exchange but RBS fell 1.1% at 38.22 pence.

"I believe that what we have got here is better structured," Treasury Chief Alistair Darling said in a British Broadcasting Corp. interview. "It is a better deal for the taxpayer."

Lloyds said it would seek to raise a record £13.5bn through a rights issue, surpassing the £12.5bn raised in March by HSBC. It also said it would raise at least £7.5bn from an exchange of debt.

Lloyds, which was also bailed out by taxpayers at the height of the financial crisis, said it would not be subscribing to a government insurance program against losses on toxic assets - a move that will keep the public's stake in the bank at 43.4% after the government takes its part of the rights issue.

'Good revenue performance'

Elsewhere, Lloyds said it had a "good revenue performance" in the third quarter and had pared costs by 2% so far this year. However, it still expects a full-year loss.

Royal Bank of Scotland Group, 70% owned by the government, announced that it had negotiated revised terms for insurance on toxic assets and disclosed disposal plans to comply with European Union conditions for receiving state aid.

Part of that deal calls for the government to inject £25.5bn of fresh capital through the purchase of 'B' shares.

RBS will sell its branch network in England and Wales and NatWest branches in Scotland, and also dispose of RBS Insurance, Global Merchant Services and its stake in RBS Sempra Commodities to meet EU conditions for receiving state aid.

Meanwhile, Lloyds said it would dispose of its TSB brand, Scottish TSB branches and some other TSB branches in England and Wales. It will also sell the branches, savings accounts and branch-based mortgages of its Cheltenham & Gloucester unit.

Both banks have agreed not to pay discretionary bonuses for 2009 performance to any employee who earns more £39 000 pounds per year, and members of both boards agreed to defer all bonuses for 2009 until 2012, the Treasury said.

Debt management

RBS agreed to revised asset insurance terms which will make the bank absorb the first £60bn of losses, compared to the earlier plan to absorb £42bn in losses.

The value of the assets to be insured has been reduced from £325bn to £282bn. RBS will pay a fee of £700m a year for three years, and £500m a year for the life of the insurance, rather than the upfront fee of £6.5bn agreed in February.

To protect against serious reverses, the government will provide a contingent capital commitment of up to £8bn for RBS, which would be available only if the bank's capital position deteriorates.

RBS has also pledged that its debt will be managed so that the bank ranks no higher than fifth in the combined global debt rankings of banks.

"I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to stand-alone strength," said RBS Chief Executive Stephen Hester.

Lloyds has agreed to pay the government a fee of £2.5bn in return for the implicit protection already provided by government support.

"The greatest 'triumph' of this entire episode for Lloyds is probably the capitulation by Brussels, possibly assisted by the UK government, apparently choosing to give Lloyds special treatment in comparison to all other state-aided banks," said analysts at Exane BNP Paribas.

"It appears strange that Lloyds is only required to sell (within four years) a selection of assets ... all of which it might well have chosen to sell anyway."

- AP