RBS and Lloyds ditch bonuses for government cash

3rd Nov 2009 08:33

Royal Bank of Scotland (RBS) and Lloyds Banking Group have agreed to defer bonuses for this year and break up their businesses in return for tens of billions of pounds of extra state aid.Neither bank will pay discretionary cash bonuses for 2009 to any staff earning above £39,000, while both boards say they'll defer all bonuses payments due for 2009 until 2012.The government is injecting upfront £25.5bn in new capital through the issue of B Shares. It has already handed the bank £20bn. That will take the government's stake in RBS to 84% from 72%.RBS will not be allowed to pay dividends for the next two years and have to sell its insurance arm and a raft of other businesses to meet European rules after agreeing to join the scheme.The new deal will see RBS cut the amount of bad loans it intends to put into the scheme from £325bn to £282bn, but will now be liable for the first £60bn of losses, up from a previously announced £42.2bn. Meanwhile, Lloyds confirmed it will raise £21bn through a fully underwritten £13.5bn rights issue and £7.5bn swap of existing debt for contingent capital.The government will take up its rights, investing £5.7bn net of an underwriting fee to keep its stake in Lloyds at 43%.Lloyds will pay a £2.5bn break fee to avoid being tied into the government's £260bn toxic asset protection scheme. "These proposals provide a significantly more attractive, market-based alternative to participating in GAPS and offer superior economic value to shareholders," said chairman Winfried Bischoff. The government said both RBS and Lloyds would sell a "significant" proportion of their retail and corporate banking assets over the next four years in order to promote greater competition.It will only let them sell the businesses to small or new players in the market. "The divestments from each bank will represent a viable stand-alone entity, together representing nearly 10% of the UK retail banking market," the Treasury said.To comply with EC State Aid requirements, RBS has agreed to sell the RBS branch network in England and Wales and the NatWest branches in Scotland and Direct SME customers across the UK.RBS Insurance, Global Merchant Services and RBS's interest in RBS Sempra Commodities, all of which occupy leading positions in their markets, are also to be sold, the bank said. RBS will also not pay investors any dividends or coupons on existing hybrid capital instruments for two years."I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to standalone strength," said chief executive Stephen Hester. "While we have a great deal to do to deliver on our strategic plan, I believe that we now have the clarity that will allow us to move forward and we will do that with both strong resolve and confidence."