Banking drama: HBoS and RBS shares bounce back after day of turmoil

SHARES in Royal Bank of Scotland and HBoS bounced back today as confidence grew among UK investors.

Shortly after 9am, RBS was up by more than eight per cent at 71.2p, while HBoS was up by more than four per cent at 93.8p.

In the aftermath of the Government's announcement that it will inject up to £37 billion in RBS, HBoS and Lloyds TSB, shares in the banks slumped amid fears among shareholders of their stock being diluted and no dividends being paid under part-nationalisation.

But analysts had said that once the initial fears are passed, they expect investors to take a longer-term view of the potential future value of their holding.

Aside from banking stocks, shares performed well yestercay with the FTSE 100 Index enjoying its second-biggest rise, surging 8.3 per cent. The momentum continued today, with the first hour of trade seeing the index rise by another five per cent to 4467.84 points.

Yesterday's losses for Scotland's two biggest banks came on one of the most dramatic days in UK banking history.

Sir Fred Goodwin and Sir Tom McKillop both said they would leave Royal Bank of Scotland, while Andy Hornby and Dennis Stevenson will leave their roles at HBoS once the takeover by Lloyds TSB goes through.

RBS confirmed that chief executive Sir Fred, dubbed 'Fred The Shred' for his ruthless approach to banking, will leave his role, to be replaced by British Land boss Stephen Hester, while chairman Sir Tom and RBS Global Markets boss Johnny Cameron will also go.

The Government has said it is to invest a combined £37 billion in RBS, Lloyds TSB and HBoS – meaning the taxpayer will become a major shareholder in some of the UK's biggest institutions.

And Lloyds confirmed that it has renegotiated its takeover of HBoS.

RBS is to raise £20bn of new capital through a Government-guaranteed £15 billion share issue and a £5bn Government cash injection.

HBoS is to raise £11.5bn in new additional capital, including £3bn through preference shares with the Government, while Lloyds wants £5.5bn of new capital.

Barclays said it is not turning to the Government for emergency funding, unveiling instead plans to raise more than £6.5 billion from investors to help shore up its balance sheet.

But the capital injection was being seen as bad news by shareholders fearful of their own investments being diluted by the new Government shares.

As part of the plans, the Government has pledged to review the remuneration of senior executives – both for 2008, when it expects no cash bonuses to be paid to board members, and for long-term incentive schemes.

The Government will also have a say on the appointment of new independent non-executive directors and on dividend policy.

Banks have also been told to commit to offer competitively-priced lending to homeowners and to small businesses.

RBS chairman Sir Tom, who is to retire in April, said: "The steps we have announced today, taken in conjunction with the Government, will secure a stronger future for the RBS Group.

"We regret having to raise new capital but believe that decisive action is necessary in this unprecedented market environment.

"Following the recapitalisation, RBS will be one of the best-capitalised banks in the world, enabling us to support our customers while pursuing our refocused strategic goals."

Both Sir Fred and Sir Tom had come under pressure after agreeing to head the consortium that acquired Dutch lender ABN Amro for £49bn last year at a time when the banking sector was beginning to decline across the globe.

They both faced confrontation from angry shareholders at the bank's AGM in April after it was announced that the bank was to seek an additional £12bn from shareholders in a bid to shore up its finances.

Today's drama, which will see three Government directors appointed to the RBS board, will see 60 per cent of the company owned by the Government.

The combined HBoS and Lloyds TSB entity is expected to be around 40 per cent Government-owned once the merger is complete, and will have two Government directors.

Chancellor Alistair Darling said that the Government was injecting "very substantial sums" into banks in order to stabilise the system.

"It is necessary because we are going through quite extraordinary circumstances the world over," he said.

"I believe that what we are doing will help, it will go a long, long way to reassuring people.

"There is a lot of turbulence to go through yet, there are a lot of bumps along the way, but I believe that this first step will help in two respects.

"First, it makes our banks strong. Secondly, of course, it is beginning the process of making lending easier."

He added: "There will be restrictions on what happens on boardroom pay and we are also getting guarantees in relation to increased lending to businesses, as well as to mortgages too."

The restructuring of the Lloyds/HBoS comes after concerns that shareholders would not approve the deal on its existing terms because of the plummeting HBoS share price.

In a statement today, HBoS said: "HBoS reaffirms its confidence in the substantial benefits for shareholders that will arise from its proposed acquisition by Lloyds TSB. Revised terms are to be recommended to shareholders reflecting today's announcement in respect of capital raising by both companies and the impact of significant disruption in financial markets.

"The resulting capital and funding position for the proposed combination establishes a strong platform from which the enlarged group can create value in the long term."

The re-adjusted HBoS/Lloyds deal means that every HBoS shareholder will now receive 0.605 Lloyds shares for each share they own, down from 0.833 previously.

A spokesman for HBoS insisted that the deal will go through. He said: "The deal is done and the ink is dry".

Sir Victor Blank, chairman of Lloyds TSB, said: "Today's news is good for investors and customers alike. Lloyds TSB's already robust financial position is further enhanced by today's capital raising which in turn allows us to drive forward with our plans to acquire HBoS.

"Our trading update underlines that our core business is strong and growing. Our customers can feel confident that their money is secure. Lloyds TSB is, and remains a great place to bank."