A profit of £61 million on £3.2 billion worth of shares may not seem much to shout about, but the UK government’s sale of the first tranche of its stake in Lloyds Banking Group marks a watershed moment in Britain’s recovery from the financial crisis.
Five years to the day since Lloyds TSB rescued Halifax Bank of Scotland, Britain's biggest mortgage lender, in a disastrous government-brokered deal, the reprivatisation of the state-backed bank has begun.
Even a couple of years ago, few in the battered banking sector could have imagined the taxpayer would come away with any sort of profit from the £21 billion poured into the bank in a desperate attempt to keep it from collapse.
The 6 per cent stake sold yesterday is slightly smaller than had been expected in recent weeks, but, at £3.2 billion, is a sizeable chunk of shares and the largest British privatisation since British Telecom 20 years ago.
Five years ago, the hastily arranged Lloyds/Hbos deal failed to stem the panic in financial markets. The day it was announced, shares in Hbos halved at one stage, the FTSE 100 index tumbled by 2 per cent and the gold price rocketed 11 per cent, its biggest-ever one-day rise.
The mood yesterday was very different. George Osborne could barely contain his delight, and took to Twitter to give his early morning reaction: "Confirm have sold 6% of Lloyds shares at 75p. Profit for taxpayer & important step in plan to get their money back and repair economy."
'Turned a corner'
Later, the chancellor hailed the successful sale as a sign that the British economy had "turned a corner" and said the money raised would be used to reduce the national debt.
Based on the 61.2p price at which Lloyds shares are held on the public accounts, the sale proceeds will reduce the nation’s national debt by £586 million.
Osborne can be forgiven his triumphalism, although some in the City queried his calculations on the £61 million profit, arguing that the cost of borrowing the bail-out money should be taken into account.
However, analysts hailed the timing as “impeccable” and say the government may even be able to offload the whole of its remaining 32.7 per cent stake, possibly through a sale of shares to the public before the next election in May 2015.
Lloyds’ chief executive Antonio Horta-Osório, who had been urging the government to start the sale process for some time, must be every bit as delighted as Osborne. Having seen the bank’s shares virtually double over the past year, the Lloyds boss understandably wants his business free of government ownership.
His £1.5 million bonus from last year is also tied to the share sale – provided the shares stay above 73.6p (the average price paid by the government) for a month, Horta-Osório will be able to collect his windfall, although he will have to wait five years.
Good news has been in short supply in the banking industry in recent years and there is another aspect of the Lloyds sale that is equally unusual. So keen were the investment banks to get a slice of the sale action, they actually gave their services to the government for free. They included JP Morgan Cazenove, Bank of America Merrill Lynch, UBS and Lazards, all of which will be well-placed to benefit from future government share sales as a result.
RBS losses
These will, at some point, include Royal Bank of Scotland, although that share stake is more problematic for the government than Lloyds. The state stake in RBS is 81 per cent and the government is sitting on a hefty loss on its investment, having propped the bank up with £45 billion. The government is currently looking into whether RBS should be split into a good and a bad bank and any sale could well be years away.
The banking sector can always be relied on to provide bad news and Barclays has proved particularly adept at that. As the final touches were being put to the Lloyds sale, and as Barclays pushed the button on its own £6 billion fundraising, it was forced to admit that up to 300,000 of its customers could be in line for compensation after mistakes in the bank's paperwork on interest calculations.
Fiona Walsh is business editor of theguardian.com
