Lloyds May Boost Loans as Part of UK Asset Plan

Lloyds Banking Group could commit to lend more to home buyers and small businesses as part of an asset protection scheme that Britain's government is set to unveil with banks this week.

The government could drop a 480 million pound ($699 million) annual interest charge that Lloyds pays on a taxpayer loan in exchange for the lending pledge, the Financial Times said on Tuesday.

Sharon Lorimer

Britain is hammering out details of the asset protection scheme due to be unveiled this week, which is likely to see Lloyds, Royal Bank of Scotland and potentially other banks put up to 500 billion pounds of assets into the scheme.

The aim is to cap the amount banks could potentially lose and significantly reduce their risk weighted assets (RWA), which should benefit their capital ratios to provide a bigger cushion as they face rising bad debts from a faltering economy.

If Lloyds commits to lend more it would be another signal of the government's determination to increase credit.

Northern Rock said on Monday it will increase lending by up to 14 billion pounds over two years, in a government-led U-turn from its policy of shrinking lending since its nationalisation a year ago.

Lloyds shares closed 5.1 percent and RBS shares were up 4.2 percent.

The asset protection scheme is designed to ease financial pressures on banks and could give bank stocks a lift if the terms are not too onerous, analysts said.

"The banks get a double benefit in terms of avoiding nationalisation: they pass a chunk of the potentially fatal tail risk onto the government and they take out a major slice of risk weighted assets," said Bruno Paulson, analyst at Bernstein Research.

If the plan follows the U.S. example and reduces the risk weighting from about 95 percent to 20 percent on the covered assets it could add about 2 percentage points to the core tier 1 capital ratio of the banks, Paulson estimated.

Banks are expected to pay a one-off fee of 3 percent to 4 percent to take part, and the government is in talks on the best way for them to pay the billions of pounds needed.

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Lloyds could also convert 4 billion pounds of government preference shares, which carry 12 percent annual interest.

The preference shares were expected to be converted into non-voting equity to prevent the government's 43 percent stake rising above 50 percent, the FT said.

RBS, which is 70 percent owned by the UK government, is expected to put up to 250 billion pounds of assets into the scheme, and Lloyds could put in a similar amount, according to analysts' estimates.

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