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Long hangover for banks

The government still faces a struggle extracting its banking stakes at the right price
March 12, 2015

Improving conditions in the banking sector and a chancellor eager for good news have put the government's equity overhang in rescued UK lenders back on the agenda.

IC TIP: Hold

The taxpayer now owns 22.9 per cent of Lloyds Banking (LLOY), down from 40 per cent in 2009, after the government sold off another 1 per cent of the bank's stock this week. Investors have been encouraged by Lloyds' first dividend in six years, and its progress towards selling its stake in TSB by its 2015-end deadline.

Things are trickier for Royal Bank of Scotland (RBS), where chancellor George Osborne this week signalled his intention to move as quickly as possible to "get rid" of the government's stake. The former global banking giant's shares are currently trading at 360p, some way short of the government's break-even price of 455p - the point at which the government manages to extract itself at fair value to the taxpayer, factoring in the various costs of taking the stake.

But it is difficult to predict the market effect of such a majority owner selling down their stake - the government currently owns 79 per cent of the otherwise failed lender. "Does the government starting that sale reduce the overhang, or create the overhang?" asks Mike Trippitt, director in the banks equity research team at broker Numis. He plumps for the latter, arguing that market uncertainty would start to be reduced by that process.

Either way, the fact that such issues are being addressed suggests there may be more buyers to balance out the big seller on the other side of the market. The banks have become more investable, says Mr Trippitt, and will tempt investors who have been sitting on the fence to increase their weightings.

The question is how the "measured and orderly sell down" targeted by UK Financial Investments, the organisation set up during the financial crisis to manage the government's extraordinary bank stakes, will be affected by political machinations as the various interested parties will want to be seen to be at least getting some symbolic value for the taxpayer.