Government readies banks for return to private ownership

LONDON Mon Jun 10, 2013 2:41pm BST

Signs outside branches of Lloyds TSB bank (top) and the Royal Bank of Scotland (RBS) are reflected in windows in London in 2013 file photos. REUTERS/Stefan Wermuth/Toby Melville

Signs outside branches of Lloyds TSB bank (top) and the Royal Bank of Scotland (RBS) are reflected in windows in London in 2013 file photos.

Credit: Reuters/Stefan Wermuth/Toby Melville

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LONDON (Reuters) - The government will give its strongest indication yet that it is ready to return part-nationalised Lloyds Banking Group and Royal Bank of Scotland to private ownership later this month, political and industry sources said.

Chancellor George Osborne will signal the time is right to offload the government's 81 percent shareholding in RBS and a 39 percent stake in Lloyds in his annual Mansion House speech to financiers on June 19, the sources said on Monday.

The government pumped a combined 66 billion pounds into the banks to keep them afloat during the 2008 financial crisis. It is keen to start re-privatising the banks before the next election in 2015 and Prime Minister David Cameron said last month that he was "open to all ideas" for returning the banks to private ownership.

The Treasury and UK Financial Investments (UKFI), which manages the government's stakes, are still looking at a range of options and Osborne is not yet ready to set out how the shares will be disposed of, the sources said.

Think tank Policy Exchange said on Monday the government should sell a minority of the shares to institutional investors and hand the rest to the public via a mass distribution that could give individuals shares worth up to 1,650 pounds.

The Chancellor is waiting for the publication of a report from the Parliamentary Commission on Banking Standards, which he set up last year, before formulating his plans. That report is expected before the Mansion House speech and could come as early as Thursday.

The commission, which is debating its final proposals, is likely to make recommendations on the future of RBS and Lloyds as part of a wider examination of competition in the industry. It could recommend breaking up RBS, an option favoured by commission member Nigel Lawson, one of Osborne's predecessors, but opposed by the current Chancellor.

The Financial Times reported on Monday that the government could sell 10 percent of Lloyds by the end of the year, primarily through a placing of shares with institutions. The Sunday Times said it could sell Lloyds shares via a discounted offer to the public.

The Treasury and UKFI declined to comment.

Lloyds is currently valued at 44 billion pounds, while RBS is worth around 20 billion. The sale of both banks would dwarf that of Britain's Royal Mail which, with a value of 2-3 billion pounds, is expected to become the country's biggest privatisation for two decades later this year.

Policy Exchange is known to have the ear of senior government figures, adding weight to the chances of its proposal being given serious consideration. Osborne hired Neil O'Brien, a former director of the Policy Exchange, as a special adviser last year.

Policy Exchange's proposal would enable 48 million taxpayers to apply for shares at no cost and with no risk attached, the think tank said. A 'floor price' would be set and taxpayers would make a profit on any rise in the shares above that level.

The Policy Exchange report didn't indicate what the floor price for each bank should be.

But, for example, the government could set it at 400 pence on RBS shares, and, if a taxpayer takes the shares and later sells them at 500p, they would get 100p per share and the Treasury would automatically get 400p back.

A mass share distribution would enable both RBS and Lloyds to be fully nationalised in 2014.

Taxpayers would not lose money as the shares would be returned to government ownership after ten years should they not rise above the floor price.

Shares in Lloyds are currently trading marginally above the price which the government regards as break-even. However, the government is sitting on a loss of 8.6 billion pounds on its investment in RBS at current prices. (Additional reporting by William James and Steve Slater; editing by Erica Billingham)

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