U.K. banks edge ever closer to nationalization

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Feb 2, 2009, 5:14:34 AM2/2/09

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U.K. banks edge ever closer to nationalization

Royal Bank of Scotland favorite to follow Northern Rock into public ownership

By Simon Kennedy, MarketWatch

Last update: 5:52 a.m. EST Jan. 20, 2009

LONDON (MarketWatch) -- The U.K. government's latest bank rescue package has done little to stave-off the prospect of further nationalizations, analysts said Tuesday, the day after almost 20 billion pounds ($28.5 billion) was wiped off the value of the country's top four lenders.

The government's plan, hammered out over the weekend, is intended to insure banks against the majority of future losses on their risky assets and guarantee additional billions in bank debt.

But details of how the plan will actually work were thin on the ground, meaning it wasn't able to lift worries over falling capital levels, rising charges to cover customers who default on their loans and the possibility of the government taking further equity stakes or fully nationalizing banks.

"It is this risk of creeping nationalization that is stalking the banks across Europe, including the U.K. and Ireland," said Eamonn Hughes, an analyst with Goodbody Stockbrokers.

Among the main U.K. banks, Royal Bank of Scotland (UK:RBS: news ,chart , profile ) (RBS

) is seen as the most likely to follow mortgage lender Northern Rock down the path of full nationalization.

Shares in RBS lost around two-thirds of their value Monday after it also warned it may report a loss of up to 28 billion pounds for 2008 -- the largest in U.K. corporate history. See archived story.

The bank's warning, along with a luke-warm reception to the government's plan, and fears over capital levels at newly merged Lloyds Banking Group (UK:LLOY: news , chart , profile ) (LYG

) sent the rest of the sector lower, with Lloyds ending down 34%.

In total the declines wiped around 9.2 billion pounds of the value of RBS shares and a total of 19.7 billion pounds off the value of the country's four main domestic banks.

"In essence, the market is now taking the odds-on view that RBS will go the way of Northern Rock into full nationalization," said Hughes.

Macquarie Research analyst Robert Sage said he's scrapped his price target and recommendation on RBS as a nationalization "is increasingly our central case."

In terms of the other U.K. banks it's still too early to gauge any likely impact from the government's plans, he added.

"Benefits for the valuation of banks' equity shares are difficult to assess in advance of the publication of fuller details, but the risk of further U.K. bank failures remains high," Sage said.

Shareholders hit back

The U.K. Shareholders Association late Monday spoke out against what it claimed is the "creeping nationalization of the banking sector by the government."

The industry group, which represents small shareholders, said RBS is now being run in the interests of the government and taxpayers, rather than shareholders.

"UKSA suggests that forcing banks to make increase lending to levels that they consider imprudent given the financial circumstances and the economic outlook is the wrong policy and will fatally undermine the independence of these companies," the association said in a statement.

"It is nationalization by stealth and will be enormously damaging to the interests of the UK financial sector in the long term."

The group also highlighted the risk of further capital increases for Lloyds and Barclays (UK:BARC: news , chart ,profile ) (BCS

) , a possibility also raised by Keefe, Bruyette & Woods analyst Mark Phin, who cut net asset value calculations on the banks by 30% to 40% to take account of a possible capital increase.

Barclays has so far avoided taking government money directly, but Lloyds is now 43% owned by the government following its acquisition of HBOS. Another capital boost for Lloyds could therefore see it become majority-owned by the state.

The remaining major U.K. bank, HSBC Holdings (UK:HSBA: news , chart , profile ) (HBC

) is widely seen as financially stronger than its rivals and in little danger of needing government cash.

However analysts have become increasingly concerned in recent weeks that it will have to raise more capital from existing shareholders.

Societe Generale analyst Patrick Lee said Tuesday that the bank's status as a safe haven is at risk and that it may have to force shareholders to take their 2009 dividend in shares in order to preserve its capital.

Lee initiated his coverage of HSBC with a sell rating Tuesday.