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Bailed-out banks still aren’t ready to sell, even after three years and £90bn

There had been hope that the government could divest itself of Lloyds and RBS in 2012. But the taxpayer is still sitting on a substantial loss

The clean-up bill for Royal Bank of Scotland and Lloyds Banking Group has already topped £90bn, put nearly 80,000 jobs on the line, and left taxpayers nursing a £32bn loss on their stakes in the bailed-out banks. But when they report their results for 2011 this week, both are likely to concede that their salvage operations are not yet complete, despite three years of downsizing and reshaping.

Sir Philip Hampton, chairman of RBS, admitted recently that when he took on the job he had expected 2012 to be the year that the government could herald a sell-off of the bank’s shares.

Yet, with the economy, the ongoing crisis in the eurozone and a series of regulatory changes – including the ring-fencing proposals from the Vickers commission on banking – all combining to weigh down on bank share prices, analysts reckon that the government will be stuck with an 82% stake in RBS and a 41% stake in Lloyds for some time yet.

Robert Talbut, chief investment officer of Royal London Asset Management, says: “It is very clear to everyone that the government are going to hold these stakes for much longer than anybody anticipated. The prospect of the government being able to sell down their stakes in the next three years is extremely slim. That is due to regulatory change both in the UK and globally. It is also due to the interrelation between the growth rates in the UK economy and what that means for asset values on a lot of the assets that they have on their balance sheets.”

Despite the costs of cleaning up – £38bn at RBS and £54bn at Lloyds – an array of bonus payouts is on the cards, particularly at RBS, which on Thursday will unveil the size of its bonus pool for 2011 when it publishes full-year results. A figure of about £500m is expected for the bonus payouts, about half of last year’s total. While Hester has waived his bonus, he will receive other payments this year while several of his close lieutenants stand to share as much as £11m when share awards dating back as far as 2009 pay out in the next few months.

Lloyds, which a year ago heralded a return to profitability after the controversial takeover of HBOS, will plunge back into loss after making the £3.2bn provision for payment protection insurance that new chief executive António Horta-Osório demanded weeks after taking the helm in March. The three-year integration of HBOS should now be complete; it has cost 30,000 jobs with another 15,000 sanctioned over the next few years by Horta-Osório, who returned to work in January following two months off caused by fatigue. Analysts at Nomura say: “We believe the two groups will continue to see downgrades to results in both their core operations and in the costs of exiting non-core [businesses].”

Even after a rally in their shares – RBS stood at 27p and Lloyds at 35p on Friday – they are still stuck below the average prices of 50.2p and 73.6p at which the taxpayer bought in during the bailouts that began in October 2008. The Nomura analysts reckon this is not a time to be drawn in. “We regard the current sector rally as a selling opportunity in what are likely to be drawn-out recovery projects in both cases,” they say.

But it is a chance for City and private investors to sell, if not the government – unless the Treasury is prepared to stomach the first tranches of shares being sold at such a huge loss.

When Sir David Cooksey retired in January as chairman of UK Financial Investments – which Labour set up to control the taxpayer stakes in the bailed-out banks – he admitted: “Disposals of the investments in Lloyds and RBS will inevitably take longer than originally expected, given the challenging economic and banking industry environments both in the UK and globally.”

The Liberal Democrat leader Nick Clegg suggested last year that one way to tackle the problem might be to give away the shares to the 45 million people on the electoral roll.

While the Treasury might be stuck with the shares for longer than expected, there are obvious signs of progress. Lloyds had weaned itself off the Bank of England’s special liquidity scheme by the time it ran out in January after it kept the bank afloat during the deepest days of the banking crisis. It is also trying to sell to the Co-op 632 of its branches that the EU has demanded be divested under European rules governing state aid, although for some analysts the progress is slow. The losses on bad loans made by HBOS, which Lloyds rescued in 2008, appear to have peaked.

RBS, meanwhile, has reduced its balance sheet to £1.4 trillion – still the size of the UK economy but considerably smaller than the £2.2tn that the taxpayer faced bailing out during the crisis. Hester is pulling out of the loss-making parts of investment banking while the flotation of RBS’s insurance arm — which includes Direct Line, Churchill, Privilege and Green Flag and must be sold to satisfy EU state-aid rules by the end of 2014 – is getting closer: the outfit, formerly RBS Insurance, adopted the Direct Line name last week in what was regarded as a step towards the exit.

If the government is to hold on to its bank stakes for longer than expected, the opportunity should be seized, according to Gavin Hayes of left-leaning thinktank Compass. “The government should be taking a much more interventionist approach, both in terms of lending to [small businesses] and continuing to intervene in terms of executive remuneration at the banks, ” Hayes says.

Lending to businesses is a big issue for the coalition: the rate at which corporate loans were repaid in 2011 outpaced the speed at which new ones were granted despite the “Project Merlin” lending targets agreed with the government.

A contraction in lending is a worrying sign for any government hoping to foster economic growth; the economy shrank by 0.2% in the fourth quarter (although that figure will be updated this week). Tony Greenham, head of finance and business at the New Economics Foundation, reckons the existence of the targets at all is a “sign of failure”. “A functioning banking system should not require government to intervene so that businesses have access to credit,” he says.

Others, such as Lib Dem peer Lord Oakeshott, argue that lending targets should be imposed. He says: “There’s no realistic prospect of selling these stakes in the next few years. We must now set net business lending targets for the nationalised banks, as set out in our coalition agreement. We’ve poured in £3,000 for every single taxpayer – so they’ve a democratic duty to lend.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds