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 financial crisis.
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.