Britain's four bad banks... a year on

A year ago today the Government part-nationalised RBS and Lloyds. James Moore looks at what happened and the prospects for a future sell-off of these and the other two state-owned banks

RBS
Share price: 48.1p
Government buy-in price: 50.5p, taxpayer currently losing £950m

What happened?

How the mighty have fallen. It's hard to believe that RBS was once the second biggest listed bank in Britain and a genuine global power. Unfortunately, the castle was built of straw. The hostile takeover of NatWest, achieved in 2000 after a bitter struggle with rival Bank of Scotland, was what propelled the RBS and chief executive Sir Fred Goodwin into the big time.

An acquisition spree followed with a string of deals in the UK and overseas (notably the US). Then Barclays threatened to usurp RBS' position as Britain's second biggest bank with an all-share takeover of ABN Amro. Sir Fred tabled an alternative, cash-funded bid to break the bank up in cohorts with Fortis and Banco Santander. He won. The trouble is that within ABN were some assets that were not merely toxic, they were radioactive. Some of RBS's own lending was also none too clever. Last year the Government had to inject £20 billion. It now holds around 70 per cent of the shares.

Where is it now?

In a bit of a mess. Operating losses of £3.3bn and £7.5bn of bad loans in the first half. Up to £316bn of dodgy assets that the Government is set to underwrite. Chief executive Stephen Hester, who knows a thing or two about bad banks having helped sort out Abbey National, pulled no punches when he admitted the bank was in poor shape at its interims. Of course, Mr Hester had no need to talk up prospects, entering the bank as a "new broom" with a brief to sort it out (with up to £10m in his back pocket if he can). In his view, RBS is saveable but it will take five years and results over the next two years at least will be poor. RBS is also finding it difficult to keep its best staff. We might see a small(ish) rights issue now that the shares have recovered to cut the cost of the premium to the Government for protecting the toxic assets. Disposals are also likely.

What are the chances of a successful sell off for the Government?

Pretty good. UK Financial Investments (which holds the shares) might try a first share sale in a year or two – if the economy comes good. A "double dip" recession would spoil the party.

LloydsTSB
Share price: 91.6p
Government buy-in price: 122.5p, taxpayer currently losing £3.7bn

What happened?

Before the credit crunch Lloyds TSB (as it was) was just about the safest bank in Britain. Chief executive Eric Daniels was regularly criticised for being too conservative. The bank had the sector's highest dividend and sold off some attractive assets to ensure that payout could be maintained. It also refused to get involved in risky M&A transactions. Then, on 18 September 2008, under pressure from the Government, it announced a shotgun marriage with an HBoS teetering on the brink of collapse. A year ago today, the Government injected £14.5bn into the bank at an average price of 122.6p. The taxpayer owns 43 per cent.

Where is it now?

Lloyds is the member of the frightful four whose future is the most murky and whose management has been the least forthcoming about where it is going, a particularly egregious sin given that their wages are partly paid for by the taxpayer. The bank would like to be able to pull off a rights issue which would keep it out of the Government's asset protection scheme. That would provide insurance for around £260bn of toxic assets for a premium of around £26bn, paid for in shares. Expensive, and European regulators would demand concessions if they are to approve the scheme because of the dominant position the bank has in several markets. Lloyds appears to have found support in the City and may be able to supplement a cash call with disposals.

However, it will first have to secure approval from the FSA and the Government. Mr Daniels' says the merger will ultimately prove to be in the interests of shareholders. His job rests on him proving this. He has predicted that bad debts at the bank have peaked – loan losses stood at £13.4bn in the first half. But most experts say bad debts don't reach their highest level until six months after a recovery has started. It's not yet clear that it has.

What are the chances of a successful sell off for the Government?

Good in the long run – if the economy recovers. Lloyds is the UK's most powerful consumer bank. A sell off will take time and will probably be accomplished by institutional share placings.

Northern Rock
Share price: N/A
Government buy-in price: Zero, but shareholders seeking compensation.

What happened?

The bank that set the ball rolling. An ill-advised leak to the BBC about the mortgage lender calling on emergency funds from the Bank of England saw queues of people outside branches seeking to withdraw cash. Northern Rock borrowed short term on the money markets to lend long through mortgages. With only a small base of depositors, when the funds from the former dried up, it was done.

Where is it now?

Fully nationalised. The Government would like to package most of its existing loans up into a "bad bank" and sell off what remains (branches, new loans) as a "good bank". This awaits EC approval. The former Barclaycard boss Gary Hoffman runs the show, but his record there was less than stellar so questions remain.

What are the chances of a successful sell off for the Government?

High. Not inconceivable that "good bank" could be sold before election. The only fly in the ointment is the EC. And the compensation claim over the way the company was nationalised.

Bradford & Bingley
Share price: N/A
Government buy-in price: Zero. Taken on £40bn mortgage book but taxpayer can claim from industry funded Financial Services Compensation Scheme.

What happened?

A former building society that got in over its head, focusing on the high-risk buy-to-let loan market and reliant on money-market funding. In June 2008 a £400m rights issue was launched, but much of it was left with underwriters. It was not helped by Texas Pacific, the private equity firm which had agreed to take a 23 per cent stake, withdrawing its support. Nationalised last September with the share price in freefall. Banco Santander paid £612m, including the transfer of £208m of capital relating to offshore companies, for B&B's retail branches, deposit book and offshore businesses via Abbey. The loans are left with the taxpayer.

What are the chances of a successful sell off for the Government?

The loans will ultimately go into the bad bank (like Northern Rock's). At some point, a company specialising in such assets might be persuaded to take them on, but not for a long time.