Government to hold 43.4 pct of Lloyds-HBOS bank

LONDON (Reuters) - The state is to take a 43.4 percent stake in the combined Lloyds TSB-HBOS bank after shareholders largely shunned both lenders' rights issues, the two banks said on Monday.

Existing shareholders bought just 0.5 percent of the new Lloyds shares offered in its rights issue, and 0.24 percent of the HBOS shares, leaving the government to buy up the remainder, the banks said.

The government agreed to underwrite the two lenders' capital raisings as part of its 37 billion pound bailout of the banking sector in October last year.

The low level of shareholder participation in the Lloyds and HBOS rights issues was expected, as both banks' shares had fallen below the price at which new stock was offered to the market.

By 11:05 a.m. British time, Lloyds shares were up 5 percent at 138.2 pence, below the rights price of 173.3 pence. HBOS shares were 4 percent higher at 82.9 pence, compared with a rights price of 113.6 pence.

"We understand that many existing shareholders did not participate because of the divergence between the offer price and the current market price," Lloyds TSB Chief Executive Eric Daniels said in a statement.

"We are pleased that the capital raising process has completed and that the new combined group will have a strong financial position."

CAPITAL STRENGTH

The twin rights issues will raise about 17 billion pounds in capital for the combined bank, buffering it against potential further losses on risky credit-related assets, as well as an anticipated rise in bad debts this year as the UK succumbs to recession.

Lloyds' takeover of HBOS, brokered by the government in September last year after a dramatic slump in HBOS' share price threatened to undermine consumer confidence in the bank, is expected to complete on January 19.

The combination is expected to clear one of its final administrative hurdles later on Monday when it gains the approval of a Scottish court.

The acquisition will create a dominant retail financial services group controlling a third of all UK current accounts and 28 percent of the country's mortgages, and would under ordinary circumstances have been blocked by competition regulators.

The outlook for the enlarged bank, named the Lloyds Banking Group, hinges on the extent to which bad debts and write downs against risky assets held by HBOS offset projected cost savings of at least 1.5 billion pounds.

"It's a classic short-term risk, long-term value trade-off," said Oriel Securities analyst Mike Trippitt.

"The power of the group in a normal market will be quite big, but the near term concern is the risk it's taking with the toxic waste on HBOS' balance sheet."

The state already holds a 58 percent stake in Royal Bank of Scotland after its shareholders spurned a similar government-sponsored rights issue in November.

The government's bailout of the banking sector was designed to prevent major lenders going bust as a wave of defaults against U.S. sub-prime mortgages paralysed wholesale credit markets, depriving banks worldwide of a key source of funding.

UK Financial Investments, the body set up by the government to manage its bank holdings, will shortly appoint four non-executive directors including Glen Moreno, the chairman of media group Pearson, the Sunday Telegraph reported at the weekend.