RBS, Lloyds in major shake-up

       Britains two largest retail lenders have agreed to a massive shakeup of the UK banking sector that will see both sell hundreds of branches and key businesses to appease EU competition concerns over state aid.
       Partly nationalised Royal Bank of Scotland and Lloyds Banking Group ended months of uncertainty yesterday,with Lloyds announcing it would drop out of a government-backed insurance scheme for bad debts by raising ฃ13.5 billion ($22.08 billion) in the worlds largest ever rights issue, as part of a ฃ21 billion capital raising plan.
       The move leaves RBS, 70% stateowned, as the only bank joining the governments Asset Protection Scheme (APS) but RBS said it had secured more flexible terms than envisaged earlier this year that will allow it to exit the scheme within four years.
       Both banks, however, were also hit by disposal orders to meet EU state aid rules, with RBS forced to sell chunks of its retail bank, RBS Insurance and to shrink its investment banking arm.
       We do feel bruised by what weve had to go through, RBS chief executive Stephen Hester told reporters on a conference call.
       We feel that the job (of turning around RBS) has been made more difficult for us but we understand the conflicting pressures.
       Our job has been made more difficult by some of the aspects of the EU settlement but nevertheless we believe it is a doable job, he added.
       The UK government said the disposals deal announced yesterday would increase competition in retail banking,bringing at least three new banks onto Britains high streets in the next four years.
       The Exchequer said Lloyds and RBS would between them have to sell off businesses equating to 10% of the UK retail banking market. Only new entrants or small players in the UK market will be allowed to buy the assets, raising the key question of which buyers will step up.
       Lloyds said it would sell 600 of its retail branches, with disposals including Lloyds TSB Scotland and the Cheltenham & Gloucester mortgage business branches, as well as its Intelligent Finance and the TSB brand.
       RBS facing tougher EU sanctions including punitive sales imposed as late as this week will be forced to sell NatWest branches in Scotland, RBSbranded branches in England and Wales,along with RBS Insurance, Global Merchant Services and RBS Sempra Commodities.
       Both banks will have up to five years to make the sales.
       To avoid the APS, Lloyds said it would raise ฃ21 billion ($34.3 billion) via a ฃ13.5 billion rights issue and by swapping ฃ7.5 billion in existing debt into contingent capital, which will support the banks capital requirements.
       The move will allow Lloyds to avoid the fees associated with the scheme and will cap the governments stake at 43% while also helping the bank get a better deal with Brussels.
       RBS said its participation in the insurance scheme would be under better terms, confirming an expected payas-you-go arrangement that will allow it to pay annually, rather than via a single upfront fee of ฃ6.5 billion, making it easier for the bank to exit it altogether within four years.
       It will now pay ฃ700 million a year for the first three years of membership and ฃ500 million a year thereafter. Under the deal, the extent of any losses borne by the bank rather than the government will rise to ฃ60 billion from ฃ42 billion previously, making it unlikely the bank will dip into the APS fund.
       In return for sidestepping or limiting the impact of the APS the banks also agreed not to pay discretionary cash bonuses in relation to 2009 performance to any staff earning above ฃ39,000 while executive members of both boards agreed to defer all bonuses payments due for 2009 until 2012.