My Castle is Bigger than Yours
Finally the market is acting like it believes LLOY has raised enough capital to see it through this recession. LLOY shares have rallied since the announcement of its participation in the Government’s Asset Protection Scheme (entailing the issue by LLOY of £15.6 bln in B shares to HMT). This rally has also been noteworthy in that it is also taking place against the backdrop of a £4 bln rights issue, underwritten by HMT at 38.43 pence (the same 8.5% discount to the prior close as has been used by HMT in underwriting all bank capital raising exercises since Oct 2008).
This indicates that investors believe this rights issue will be the last in the current series for LLOY and that HMT may not end up wearing the whole issue. Technically a virtuous circle may push LLOY shares higher still as LLOY are currently cum-rights and therefore the further they rally, the more valuable the embedded rights become (especially as there is an over-subscription option). LLOY gives a new meaning to a fortress-style balance sheet for a bank with a Core Tier 1 capital ratio of 14.5% (JP Morgan used to be described as running a fortress-style balance sheet with an 8% capital ratio). LLOY management are also sure to know full well which of their assets are most likely to sour and it is these which will be placed into the Asset Protection Scheme. Hence the higher 6% fee demanded by HMT to insure those assets (ameliorated by LLOY keeping its rights to tax losses).
RBS will have Core Tier 1 capital in excess of 12% after its latest £5 bln rights issue, £19 bln B share issue and participation in the Asset Protection Scheme.
HSBC must be feeling a bit left out. Previously notable for being the best capitalised UK bank run by Scottish Sensible-types in Hong Kong and London, its recently announced £12.5 bln rights issue will bring its Core Tier 1 capital ratio up to 8.6% (from 7%).
In the end of course it will be the bank whose losses nibble through their capital rather than take great big bites out of their capital which ends up best capitalised once the bank sector as a whole starts making money again. Only time will tell but BARC’s Fortress (Core Tier 1 capital of 6.7%) is looking more like a sandcastle at the moment and the tide is coming in…in good market conditions asset management companies usually change hands for around 2% of Assets Under Management but BARC will struggle to find a buyer willing to pay anywhere near £4.5 bln for its iShares subsidiary (with £226 bln AUM) in the current market conditions.
Post Script - 8 May 2009 : RBS announced its Core Tier 1 capital ratio will be 12.2% after its entry into the Asset Protection Scheme takes place.
Tags: AUM, B shares, balance sheet, BARC, Core Tier 1 capital, fortress, HMT, HSBC, iShares, jp morgan, LLOY, RBS, tax losses, tier 1 capital, virtuous circle