Taxpayers were nursing a £12.8bn loss on their stakes in the bailed-out Royal Bank of Scotland and Lloyds Banking Group at the end of 2010, dashing hopes that the government will be able to begin selling off its shares early in the new year.
While UK Financial Investments, the body that looks after the stakes in the bailed-out banks, is preparing to look for a buyer for the nationalised Northern Rock, analysts believe that any reduction in the stakes of RBS and Lloyds is still some way off more than two years after they were rescued by the taxpayer.
The new year will see dramatic changes across the wider banking sector when new chief executives will be installed at three major banks – Barclays, HSBC and Lloyds – and new bonus rules from the European Union will restrict cash payments to as little as 20% across the City.
Bob Diamond becomes chief executive of Barclays tomorrow after more than a decade running the investment banking arm, Barclays Capital. Diamond has taken home £75m in cash and performance-related share deals in the past five years and will appear before the Treasury select committee in two weeks when he may face questions about the banks' bonus policies.
Another former investment banker, Stuart Gulliver, takes the helm of HSBC tomorrow as well in a series of high-level management changes at Britain's biggest bank. Lloyds is also installing a new chief executive when António Horta-Osório joins from Santander this month before taking the top job from Eric Daniels on 1 March.
Ian Gordon, banks analyst at Exane BNP Paribas, said it was "inconceivable" that the government could begin to reduce its holdings in RBS and Lloyds before the fourth quarter of 2011. This is not just because of the losses that the taxpayer might face on its holdings but also as a result of the uncertainty created by the government's independent commission on banking, which is considering whether to break up the major banks to foster competition.
Gordon calculated that the taxpayers' loss on RBS was £10.4bn at the end of 2010 and £2.4bn on Lloyds. Shares in both banks fell today, the last trading session of 2010. RBS ended at 39p, some 11p below the 50.2p average price at which the taxpayer bought its 83% stake in the bank. Lloyds ended at 65.7p, compared with the average 74p at which the taxpayer bought its 41% stake in the bank.
The loss at the beginning of 2011 is more than half the £26bn loss that the bailed-out banks at the start of 2010 but this masks the volatility in the shares over the year. RBS has closed as high as 58.5p – a profit of more than £7bn – while Lloyds has reached 77.6p.
In April, just before the election, Labour was claiming that the bailout of the banks had been justified after the paper profit in the two bailed-out banks stood at £10bn.
Highlighting the wide movements in the shares in 2010, both banks hit lows in February of 46.5p for Lloyds and 31.25p for RBS amid fears that the eurozone faced collapse. But there has been some controversy over which price to use to calculate the profit or loss on Lloyds as the average buy-in price for the taxpayer can fall from 74p to 63.2p if fees paid by Lloyds for exiting the asset protection scheme are included.
Selling off the stakes in RBS and Lloyds is expected to take a number of years because of the sheer size of the government holdings. While some of the share sales may take place below the average price, the City expects the first sales to only occur at a profit for the taxpayer.
Northern Rock is regarded as more likely to be returned to the private sector in the first half of 2011, when UKFI is expected to conduct a "beauty parade" to appoint an investment bank to advise on the best way to maximise returns from the Newcastle-based bank, which has been split in two. The "good" bank, to be put for sale, has been stripped of the state loan.
New year, new rules
A new levy on banks' balance sheets and new rules on their bonus payouts are being introduced today in a move that the government insists will mean the industry is making a "full and fair contribution" to the wider economy.
The bank levy will raise £2.5bn a year and in 2011 will be 0.05% of a bank's liabilities, rising to 0.075% from 2012. While the government has faced criticism for not trying to raise more, City minister Mark Hoban has said the levy will "go towards helping reduce the record budget deficit that the this government inherited".
The new bonus rules restrict the amount that can be paid in cash and require payouts to be deferred over three to five years. Some have predicted that banks will offer pay rises to their staff as a result of the new code.
