April 25 (The following statement was released by the rating agency)
Lloyds and RBS are likely to join the ranks of the banks that have had to request
from the European Commission an extension of the deadline originally set for the divestment of
businesses, Fitch Ratings says.
These divestments consist of the sale of selected UK branches, imposed because
they received capital injections from the UK government during the recent
The collapse of the EC-mandated sale by Lloyds to the Co-operative Bank, known
as Project Verde, leaves Lloyds with limited time to meet the EC's end-2013
deadline. Although Lloyds has worked on separating the business for over two
years, starting before the Co-operative Bank was announced as preferred bidder
in December 2011, we expect it would take longer to fully divest Verde through
an initial public offering. The IPO is the bank's fall-back option, which is
subject to regulatory and EC approval.
RBS is undertaking a second bid process on the sale of its branches after the
collapse of the first deal with Santander UK in October. The business for sale
is substantially carved out, with a standalone management team. But execution
risk is high, as there is limited time to complete the transaction with a buyer
who can meet the UK regulatory hurdles. However, the recent relaxation of rules
for new entrants, such as reduced minimum core capital ratio and liquidity
requirements, could help this process. We would not rule out a flotation if a
sale is not achieved.
An extension of the deadline avoids the need for a forced sale or flotation
while markets are weak. The longer the extension, the greater the chance of a
financial sector recovery and more buoyant market conditions in which to sell.
The EC may be more open to agreeing changes to mandated sales in light of the
difficult market conditions. But we would not rule out additional EC measures to
compensate for any extension to the banks' restructuring plans. An extended
divestment timeframe could also keep other state aid restrictions in place for
longer, such as bans on acquisitions.
We expect other amendments, such as downsizing the assets for sale as was the
case for ING's Westland Utrecht Bank divestment, or switching from sales to
run-downs as was the case for Commerzbank's Eurohypo, to be unlikely options for
Lloyds and RBS because of the size of their retail and SME franchises.