U.K. Treasury to Inject GBP 37B in RBS, Lloyds TSB, and HBOS

The U.K. government is injecting GBP 37B in RBS, Lloyds TSB and HBOS, the Treasury announced today. The Treasury said that upon completion of these capital investments, all of these banks would have Tier One capital ratios above 9%, well above international minimum standards. It had already been announced that the government is to invest GBP 5B in RBS and to underwrite a GBP 15B ordinary shares offering. The announced about this morning was in line with rumors over the weekend, although there is no mention of possible capital injection into Barclays, which is among the eligible institutions to take part in the rescue package. The Treasury also stated that a revised debt remit for the debt management office will be released tomorrow.

Meanwhile, RBS said it is to raise GBP 20B in new capital. A GBP 15B offer of ordinary shares will be offered to existing shareholders, underwritten by the government, at 65.5 pence per share, which is a 8.5% discount to Friday's closing price. Furthermore, the government will subscribe to GBP 5B in preference shares and no dividends will be paid on ordinary shares until preference shares have been repaid. The capital raising will increase RBS's pro-forma Core Tier One and Tier One ratios by approximately 3 percentage points and 4 percentage points respectively. RBS is the first bank to announce its intentions of accepting government capital injection under the U.K. bank rescue plan.

Nevertheless, the Lloyds takeover offer of HBOS has been revised to 0.605 Lloyds TSB shares for every 1 HBOS share, compared to 0.833 previously. In a statement today, Lloyds said that it will raise GBP 17B, of which HBOS will raise GBP 11.5B. The U.K. government will subscribe to GBP 1B in preference shares. Of the enlarged group, HBOS shareholders will hold 20% or ordinary capital and 43.5% will be held by the government.

U.K. Chancellor Darling said banks participating in the government rescue program will have to increase lending to small businesses and offer more mortgages. There will also be curbs on executive pay for participating banks.After the GBP37B injection into RBS, Lloyds TSB and HBOS, the government will appoint three directors to the RBS board and two directors to the Lloyds board. The U.K. rescue plan will hence change the map of U.K. banking, with two of its largest banks (after the Lloyds' takeover of HBOS) part-nationalised. Meanwhile, HSBC, Abbey and Standard Charter had already announced that it would not look for capital injection from the government but would find other sources of funding to raise their Tier One capital. Barclays announced today that it will raise in excess of GBP 6.5B in Tier One capital, without calling on government funding.

U.K.'s Debt Management Office said it will raise issuance to meet the government's GBP 37B bank capitalisation. The DMO said it would release details of new auctions tomorrow and the new gilts sales program will start in the week of October 20. The recapitalisation of banks, plus the nationalisation of Bradford & Bingley's liabilities, will push U.K. debt-to-GDP ratios to levels last seen in the late 1970s. However, the stigma of breaking the self-imposed fiscal rule, put in place by Prime Minister Brown 11 years ago as Chancellor, must at this point be considered far less significant than it did only a month ago. Rather, it is now the decisiveness of the government that has been applauded. This last bank rescue deal was carried out with far more speed and forcefulness than the drawn-out process of trying to find a solution for Northern Rock issue last year.

GBP posted a relief rally following the U.K. government measures to recapitalise some U.K. banks. HBOS, RBS and Lloyds TSB are part of the scheme, which has seen Cable push up to 1.7222 highs before turning back in to 1.7150. Meanwhile, EUR-GBP is changing hands around 0.7950, which is in the middle of its 0.7920-65 range. Today's FTSE performance will be pivotal given the deep losses seen last week, while money market conditions will be crucial if market action is to return to a level of nomalcy. Sterling price action is expected to remain choppy, although the potential for further gains will be dependent on risk appetite. Uncertainty over the banking sector and the real economy may dampen appetite for Cable, while the risk of further U.K. rate cuts is high, which will also work against sterling as interest rate spreads narrow.

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