REFILE-UPDATE 3-Lloyds must show better deal for taxpayer-source

Thu Oct 15, 2009 12:04pm EDT

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(Corrects to remove attribution to Rathbone in para 13)

* Alternative must be "demonstrably better" than APS -source

* Talks continue to exit APS, possible rights issue

* Lloyds says in talks to sell wealth unit to Rathbones

* Lloyds shares up 1.3 percent, Rathbones up 0.3 percent

(Wraps source comments on government/APS, Rathbone talks)

By Sumeet Desai and Paul Hoskins

LONDON, Oct 15 (Reuters) - Part-nationalised British bank Lloyds (LLOY.L) needs a deal that is "demonstrably" better for taxpayers than a proposed asset insurance plan to get government backing for it, a person familiar with the matter said.

With global markets on the up, Lloyds, 43 percent owned by Britain, is considering an exit from a costly government-backed asset protection scheme (APS) to insure 260 billion pounds ($422 billion) of the bank's assets against losses from bad debts.

"The only deal that is on the table is the APS. For the government to consider other alternatives there would have to be a deal that demonstrably represented a better deal for the taxpayer," the source told Reuters on Thursday.

The source said no decisions were imminent.

To replace the scheme Lloyds would need to boost its capital by about 25 billion pounds to win the approval of Britain's financial regulator, industry sources have said.

That would likely include a rights issue of 10-15 billion pounds, sources and analysts have said. Lloyds has lined up six investment banks to run a rights issue if it gets the go ahead, people familiar with the matter said on Monday. [ID:nLC354416]

A key issue would be whether the government would support a massive cashcall, which would require it to spend about 6 billion pounds to prevent dilution of its stake.

Lloyds would have to pay the government cash in return for months of implicit support provided by the state since the bank said in March it planned to put assets in the APS. That fee would be above 1 billion pounds, a source said.

The government is still in talks with Lloyds over its participation in the APS, the Treasury said. "Any final agreement will have to be in the best interests of taxpayers and the stability of the financial system," the Treasury said.

The government would not underwrite a rights issue to take up shares not taken up by other investors, the Financial Times reported. [ID:nLE688747]

Lloyds is also considering asset sales to boost its capital and cut reliance on state support, and thereby curb any sanctions by EU regulators. [ID:nL8146693]

It said on Thursday it was in talks to sell its Bank of Scotland portfolio management service to British wealth manager Rathbone Brothers (RAT.L).

The BoS division creates and manages bespoke investment portfolios for clients with more than 100,000 pounds available to invest.

Rathbone said it was interested in private client investment management activities within Lloyds's Wealth and International division. The unit includes brands such as UK Private Banking, International Private Banking, Scottish Widows Investment Partnership and Insight Investment.

The two companies' statements made no mention of wealth manager St. James's Place (SJP.L) in which Lloyds owns a 60 percent stake and is seen as one of a number of disposals Lloyds could make. (Writing by Steve Slater; Editing by Hans Peters and Dan Lalor) ($1=.6157 Pound)

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