Lloyds sparks new bankers' bonus row

Lloyds Banking Group

Reports that Lloyds Banking Group may be about to reignite the bankers' bonus row have surfaced today as the firm looks set to pay out at least GBP£300 million in fees to investment bankers to underwrite its planned GBP£11 billion rights issue.

There are now concerns the move will begin a fresh row over bankers' pay because Lloyds, which is now 43 percent owned by the UK government, means a large portion of those fees would be borne by the taxpayer.

The problem is exacerbated by reports that suggest this isn't even the final figure. In fact, the final bill for investment bankers' services may be significantly larger, as Lloyds will also need to secure underwriting for its plans to raise a further GBP£15 billion by converting bonds and preference shares into common equity.

The firm is also trying to raise about GBP£26 billion so that it can avoid using the government's asset protection scheme (APS) and is considering the sale of other assets, such as Scottish Widows.

Investment banks normal charge rate is about three percent of the value of a rights issue in fees to provide underwriting. The Lloyds rights issue is seen by some as risky as it is one of the largest capital-raisings by a bank. As a result, investment bankers may push for a larger fee.

Yet, because the government is the majority shareholder, it is thought they will keep the fees to a minimum.

UBS, Lloyds' broker, and Bank of America Merrill Lynch, its financial adviser, are understood to have been lined up as the lead underwriters. Citigroup, Goldman Sachs, JPMorgan Cazenove and HSBC would provide sub-underwriting.

The bank is currently talking to the Treasury and its regulators over its proposal, known as Plan B, to escape the APS by raising capital by other means, UK newspaper The Times has reported.

Eric Daniels, Lloyds' chief executive, is keen to do so on the grounds that the GBP£15.6 billion APS fee is punitive and so the State's stake can be capped at its present 43 percent level. If Lloyds does enter the APS - which would involve putting GBP£260 billion of toxic assets into the scheme - the government's stake would rise to 63 percent.

Some believe that Lloyds will still have to use the APS in part because the tripartite authorities - the Treasury, the Financial Services Authority and the Bank of England - are worried about the risk of allowing Lloyds to escape the scheme completely. The Bank of England, in particular, is understood to have concerns, especially after Mervyn King, its Governor, said the economy could take another turn for the worse.

The APS - announced in February amid dire fears over banks' financial strength - was designed to be a giant insurance scheme for the toxic assets of Lloyds and Royal Bank of Scotland. RBS plans to proceed with plans to put GBP£325 billion into the APS but it wants to raise about GBP£4 billion in a placing to pay some of the fees to prevent existing shareholders being heavily diluted.

In the interim, the nightmare scenario for politicians is to allow Lloyds to walk away from the APS to undertake a bumper rights issue now, only for it to fall back on government help later - possibly near the general election.

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